It can also be thought of as the "deal" or the "story." So when someone asks you ¿Qué onda?" they are asking you, "What's the deal?" or "What's the story?" Essentially, it's a good substitute for "What's up?"
The appropriate response could be a casual, "Nada." Just like in English, responding that "nothing" is up is not a great conversation starter. So tell someone what you're up to; but don't answer "bien" or something like that.
You will also hear the expressions buena onda or mala onda. These expressions describe the nature of a person, place or even action. "Buena" is good and "mala" is bad. So something can either have "good vibes" or "bad vibes." If a person is easy going and open to new idea he can be described as a buena onda – a fantastic compliment indeed. Conversely, if someone is a jerk, they will be described as a mala onda, something visitors should strive to avoid.