In order to fight Nightmare, all you have to do is sleeping during Nightmare Night.
Boss Fight Edit
When you first begin the fight, you spawn on top of a skyscraper floating in mid air, there is also no ground holding the building. You must climb other buildings until you find one you can enter. You pull a lever to summon more buildings. However, Nightmare emerges. The only way to damage him is to get to certain buildings that has a Celestial Laser and shoot at him with it. All other attacks do no damage.
Nightmare Slash: A default clawing attack with a chance to cause paralysis.
Dark Flame: Breathes fire.
Hell Scream: Screams to summon Void monsters to attack you.
Nightmare is a large supernatural (and genderless) being born in the Void. It is also made of nothing but dark and corrupted magic.
The overall boss fight is a direct reference to the Scarecrow fight from Batman: Arkham Asylum.