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Mercurial uses a unified piece of machinery “under the hood” to handle filenames. Every command behaves uniformly with respect to filenames. The way in which commands work with filenames is as follows.
If you explicitly name real files on the command line, Mercurial works with exactly those files, as you would expect.
$hg add COPYING README examples/simple.py
When you provide a directory name, Mercurial will interpret this as “operate on every file in this directory and its subdirectories.” Mercurial traverses the files and subdirectories in a directory in alphabetical order. When it encounters a subdirectory, it will traverse that subdirectory before continuing with the current directory.