Like Joachim said, a subdomain is not the same as a subfolder. However, it is very common for people to set things up that way. Without looking at your specific account, I couldn't figure out exactly what the problem is, but here's how I would go about getting things setup as you described.
First, add the subdomain to your existing hosting account. You do this by going to the Domain Management area of the Hosting Control Center, clicking on the domain name on the left side of the page, and then clicking the Add Subdomain button. It will ask what subdomain you want, and unless you change the default, a subfolder with the same name will be created in the root of the hosting account. This is why many of our customers have subdomains that are the same as a subfolder.
Next, use our Hosting Connections tool to install WordPress. During the install process, it will ask what domain you want to use. Choose the subdomain.domain.com address that you just assigned to the hosting account. You will then be asked what subfolder you want WordPress installed in - be sure to remove the default "wordpress" subfolder and keep that field blank.
That's it. Once the install is complete, WordPress will be setup to resolve to the subdomain.domain.com address that you used. Our install process will have placed the WordPress app in the subfolder that you designated when you created the subdomain. If you visit that subfolder instead of accessing it through the subdomain, you should be automatically redirected to the subdomain because WordPress performs a redirect to the WordPress Address in its settings.
Do not setup any domain or subdomain forwarding elsewhere in your account. If you already have, you should remove those settings before doing anything else.
[In order for this to work, your domain needs to be in the same Go Daddy account as your hosting plan. If it's not, we're not able to automatically set the DNS for the subdomain. In that situation, you would need to manually create the necessary A Record in your DNS to point to your hosting plan's IP address.]
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