If you’re trying to convert from rich text to Markdown as it sounds like you are, then you need to enable the Convert rich text to MultiMarkdown checkbox, in the General options tab of the compiler overview screen. This will of course only show up when one of the Markdown-based output options are selected from the Compile For dropdown.
But really that’s more of a transitional tool, or one you might use if you really only want one of the formats provided by MD without the whole package. That checkbox aside, the program is designed to be used as a Markdown editing platform, where your source text already has properly spaced paragraphs, you aren’t using font variants to signal intent, and most likely your heading structure is coming from the binder titles and the organic structure of the outline, rather than text typed into the editor (but if not, you can still use the Styles compile format pane to insert hashes before the text as a prefix). See Chapter 21 in the user manual, or this thread.