Back at the Guild, take The Arena quest card from the map room. Now teleport to Knothole Glade.

Head north to Witchwood Lake. Go north in this area to find a door which leads to The Arena. Go up the dirt path and speak with the guard here to get access to The Arena. -- cut-scene --

You can talk to other fighters here for tips, purchase items from the shop or play blackjack for cash if you'd like. When you're ready to fight, speak to the guy with the mohawk. If that doesn't trigger a cut-scene, just keep walking around checking stuff out. -- cut-scene --

Now go up the stairs and speak to the guard to let him know you're ready to start fighting.

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