Location in WatchFast: File Menu -> Program Settings -> Misc
When this option is turned off, WatchFast will load in the files of the folder assigned to the Preset button that you activate, and it will ignore any folders within that folder, if any.
When this feature is turned on, WatchFast will load all the files in the folder, and if it finds a folder within that folder, it will load those files too. It will keep repeating this process until all the files from all the subfolders are loaded. Once the files are loaded into the list on the Player, you can scroll the list to the right to see the Path column. If you click the column header, you can sort the list by path, which will allow you to see your files grouped by folder.
If you have your folders organized with many levels of subfolders, keep in mind that you can assign any of those subfolders to a Preset button and access them directly.