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Maybe the recommended target includes your trophy number in the algorithm because they assume if you're a TH7 with 2k trophies then you know how to attack so they recommend a higher target for you. That's my guess, but this shouldn't affect the gameplay much cause it only affects what target is recommended.
It probably does go by trophies. Our clan suffered its first loss, because somehow we were paired up with a clan who had 18/20 TH8s vs. our 9/20 TH8s, and it wasn't even close in defense strength. Virtually all of their ADs were level five, and they were all hardcore farmers who had exposed THs until they moved them when the battle day started. We put up a good fight, but at the end of the day, lvl 5 troops > TH7s, simple as that. I have noticed that raiding TH7s is significantly easier after just upgrading archers to lvl 5 as my first TH8 research.