The simple solution to fold a chapter in a markdown file is with:
Then UltraEdit/UEStudio offers to fold a block from one line containing a hash and a space to next line containing a hash and a space independent on line being really interpreted by markdown processor as heading line or not, i.e. when there is a hash and a space in a code block or a quote.

But it is impossible to get a hierarchical code folding depending heading structure. Code folding is not designed for such a hierarchical folding. It is not possible to define that on having found

1. a line being interpreted as heading 1 to search for one more line being interpreted as heading 1 or end of file
2. a line being interpreted as heading 2 to search for one more line being interpreted as heading 2 or heading 1 or end of file
3. a line being interpreted as heading 3 to search for one more line being interpreted as heading 3 or heading 2 or heading 1 or end of file
4. and so on for the other heading levels
5. and run the searches for headings with recursive called subroutines whereby each subroutine is responsible for one heading level.

The code folding engine simply parses the character stream of a file from top to bottom and searches for open or close fold strings and for block comments and line comments without using a recursion and without specialized subroutines for a hierarchical fold of markdown formatted headings.

It is perhaps possible to define regular expressions to get in function list view a hierarchical list of the headings like the navigation view of Microsoft Word for a Word document. But I doubt that this can be done due to most likely required recursion with special conditions for each level as regular expression engines are not designed in general for such purposes.