Nightmare was originally created as the alter-ego of Siegfried Schtauffen, created when he got hold of Soul Edge and was consumed by the sword's will, during which time he wore dark blue armor that earned him the nickname "the Azure Knight", and went by the name "Nightmare".
Since Siegfried managed to free himself from the evil blade's influence, it has somehow formed an entirely new being, an avatar of darkness, instead of possessing a new host. This new being models himself after what he looked when possessing Siegfried. This new Nightmare, like the original, uses a great blade in battle, though his moves are unique, differentiating him from his human predecessor.
Soul Edge was once a blade wielded by the Hero King Algol, but after being stained by Blood it grew a wicked soul. No matter how hard it tried it could not take over Algol as his will was too strong, one day Algol's son Arcturus touched Soul Edge and was controlled, Algol was forced to kill his son. Algol then created Soul Calibur from a shard of Soul Edge and sealed the blades away.
In the 16th Century, Rock's father purchased Soul Edge at an auction, but his ship was attacked by Cervantes, upon discovering Soul Edge, Cervantes was possessed by Inferno. Cervantes (possessed by Inferno) owned the sword for two decades, many ventured to the port where Cervantes lived and he killed them all, absorbing their souls until Sophita came and confronted him, Sophitia managed to destroy the smaller Soul Edge but was defeated by Inferno-Cervantes, until Taki arrived and managed to defeat Inferno-Cervantes. A young warrior named Siegfried discovered Soul Edge, and Inferno realising Cervantes was useless engaged Siegfried in battle to possess him, but Siegfried managed to defeat Inferno, though the victory was still Inferno's as Siegfried touched Soul Edge and was possessed, trasnforming him into Nightmare (also known as Siegfried!)
In Soulcalibur, the concept was expanded and turned into an official character, though with changes to the design. His red armour was changed to a dark blue one, thus his nickname of "Azure Knight", and its design turned more metallic instead of flesh. This was also the first appearance of the Nightmare Arm; Siegfried's body was slowly being mutated by the sword's terrible power, most dramatically his right arm had transformed into a vicious, hard-shelled claw. Despite the Nightmare Arm only having three large fingers, it didn't seem to hinder his combat abilities at all. He now wields his own version of Soul Edge, sporting a single eye on its blade, something that would become the trademark of the various versions of the weapon, and the creations made from it, such as Charade.
Nightmare was a starting character whose style resembled Siegfried's former style upgraded. Siegfried was later added to the cast as a time-release character, and inherited the same style with minor changes and speed and weight differences. Nightmare's profile on the game explained how Siegfried obtained Soul Edge after a fierce fight against its former owner, the dread pirate Cervantes de Leon, and the firey demon that spawned within it afterward, Inferno. After that, the sword spoke to him, promising the resurrection of his dead father if he helped it gather souls. Unaware that it was a trick of the sword to restore his power, Siegfried agreed and started a killing spree, which eventually drove him to be fully possessed, taking the name "Nightmare" and spreading chaos on the lands.
Nightmare's incarnation in Soulcalibur II remains mostly the same, with minor upgrades to his fighting style, mainly on his stance. As his and other character's profiles explain, he formed a group with Astaroth, Isabella "Ivy" Valentine and Aeon Calcos (the Lizardman) in an attempt to speed the gathering of souls and restoration of the sword's power. But during the ritual to restore Soul Edge, Castle Osthreinsburg was assaulted by Kilik, Maxi, and Chai Xianghua. With his allies either defeated or missing, Nightmare confronted Kilik and Xianghua and was ultimately defeated, later falling into the collapsing void where they fought. After waking up, Siegfried, apparently free, regained his senses and tried to distance himself from the world to atone for the sins he committed as Nightmare. But the sword slowly regained control over the young man and eventually Nightmare resurfaced to start another massacre on Europe. In this game, Nightmare is a starting character, while Siegfried turned into a third costume option for him. In his second costume option, it can be seen that most of the right side of Siegfried's chest has been corrupted in a similar manner to his arm, and his right eye has changed to a golden color.
Before the events of Soulcalibur III, Nightmare met with Raphael Sorel in the Ostrheinsburg Chapel and defeated him. As he stepped forward to kill the man and harvest his soul, Siegfried's mind started to struggle with Soul Edge for freedom. Raphael, watching as Nightmare stood motionless as a result of the mind struggle, released an attack and pierced Soul Edge's eye. This allowed Siegfried to reclaim his body and also released the holy blade Soul Calibur from within Soul Edge. In a state of temporary sanity, Siegfried then drove the holy sword into the cursed Soul Edge and sealed both together, nullifying both powers. However, the will of Soul Edge escaped the sword and entered the dark blue armour that Siegfried quickly discarded after reclaiming his body. Eventually, the mysterious immortal Zasalamel found the armor and created a new body for the immobile Soul Edge out of the countless evil souls haunting Ostrheinsburg. This new Nightmare restarted his reign of terror in search of Siegfried and the rest of Soul Edge, as well as a new host to escape into, as the new body was heavily unstable.
In gameplay, Nightmare's original fighting style was split between him and Siegfried, now two individual characters. Whilst Siegfried's style replicates the previous games when he was Nightmare, the new Nightmare was given a rather different playstyle, one that was far more brutal, powerful, and barbaric than he was previously. His speed is also much faster, now capable of matching nimble characters such as Kilik and Heishiro Mitsurugi. He also gained an individual story, since it was the first time he wasn't using another character's body as a host. Nightmare, alongside Siegfried, remain starting characters and two of the main characters in which the Tales of Souls revolves around, as every character searches for rumors and traces of either one of them. They also possess their own event around the last chapters of the story, where both have a short duel, where the player later confronts the winner. His fighting style and weapon selection is available to use in the Character Creation mode under the name "Soul of Nightmare" to characters created under the Barbarian class after achieving level 30 in Chronicles of the Sword, or playing 50 matches in anything else.
Nightmare appears once again in Soulcalibur IV. By this time, Nightmare's entire body had been twisted by the power of Soul Edge completely and utterly. As the storyline of this game begins, Nightmare and Siegfried found each other once more at the Lost Cathedral. Soul Edge was freed from the Soul Embrace because of the secret art performed by Zasalamel. Nightmare took the evil sword as Siegfried became the new wielder of Soul Calibur. Then the two fought, the clashing of their swords gradually destroyed the cathedral, ripping both Nightmare and Siegfried apart only to be repaired by their swords after falling into a warp created by their duel.
Conveniently, both Nightmare and Soul Edge landed in Ostrheinsburg. Waves caused by the clash of the two swords awakened the fragments of Soul Edge that were scattered all over the world. The fragments were pulled into Soul Edge and all were consumed, restoring the blade to its whole form. As Nightmare seeded roots into the land, Ostrheinsburg soon became a cursed city that Nightmare would utilize to devour souls. The Azure Knight then prepared for his final battle against the wielder of Soul Calibur.
The storylines involving Algol feature Algol, the ancient king, whose will was strong enough to totally resist Soul Edge's power and who also created Soul Calibur in case Soul Edge ever needed to be destroyed, builds himself imitations of both soul swords wielding them simultaneously as he plots his resurrection and returns to his post as king. He gains the real Soul Edge and Soul Calibur by defeating Nightmare and Siegfried respectively.
After its destruction by Soul Calibur, Soul Edge was shattered, its fragments scattered across the world. However, minions still loyal to the cursed sword managed to track down the shards, and reassembled as much of the sword as they could. Eventually, it regained consciousness and possesed a new host. Five years later, Soul Edge was reborn. Unlike the Azure Knight who had swept through Europe as a genocidal monster, this "new Nightmare" preferred subterfuge and diplomacy. He assumed the name Dumas, and became part of the inner circle of Emperor Rudolf II of the Holy Roman Empire. He became the Graf, or Count, of the Kingdom of Hungary. From this position he would sent his servants to regain the missing Soul Edge fragments while organizing purges against innocents he deemed "malfested" in order to harvest souls to bolster his strength.
In 1607, Graf Dumas manipulates Patroklos into slaughtering "malfested" by claiming to help him search for his missing sister, Pyrrha. Eventually, Patroklos violently leaves his service and flees. Later, after reuniting with his sister, he encounters Dumas, who has reached his full power and reveals himself as Nightmare. He attacks Partroklos but is stopped by Pyrrha, who becomes truly malfested. With his power restored, Nightmare and his corrupted followers cause war throughout Central Europe. At Castle Denevér, he is defeated and killed by Z.W.E.I., and Pyrrha becomes the new host of Soul Edge. Pyrrha is then defeated by Patroklos, and in the end both Soul Edge and Soul Calibur are sealed back inside Astral Chaos.