In Settings-->Editor-->General, make sure "Folding" is enabled (I can't remember if it's switched on by default).
In Taskpaper mode, Editorial recognises lines that end with a colon (:) as headings. In Markdown mode, lines that begin with hashes (#) are headings as per canonical Markdown. Taskpaper folding respects indent levels.
Folding can also be implemented via workflows, which allows you to set things up in a way that suits you, and to control folding irrespective of syntax mode. See the following examples:
http://www.editorial-workflows.com/workflow/5830937191383040/_eD31MsIIzo
http://www.editorial-workflows.com/workflow/5808136921284608/5vSeu1APl5w
http://www.editorial-workflows.com/workflow/5876841533407232/ruJGzB9j9aQ
http://www.editorial-workflows.com/workflow/5871227071627264/MnOqmin2fvk