The "right" way I was taught as a child is to hold the towel with the length as its width -- so, towel is stretched flat across body, arms outstretched with end in each hand. Then, fold in half, in half again, and then in thirds.
Martha Stewart says to fold it in thirds length-wise and then in half and in half again. I probably do a mix of both
Also, I fold socks and underwear and even rags.