Following Dongfang Bubai's apparent death in Swordsman II, the wulin (martial artists' community) sinks into chaos as it is without a dominant leader. Several imposters use Dongfang Bubai's name to rally supporters and form their own sects, and Dongfang's lover Xue Qianxun rebuilds the Sun Moon Holy Cult with her as its new leader.

The imperial court sends a naval admiral called Gu Changfeng to accompany the Portuguese in search of Dongfang Bubai. They arrive at Black Woods Cliff, the site of Dongfang Bubai's death in the earlier film, and Gu Changfeng discovers that Dongfang is still alive and now lives at the cliff's base. Gu Changfeng manages to persuade Dongfang Bubai to return to the jianghu and Dongfang seeks to destroy all the imposters.

Dongfang Bubai unleashes his fury and starts a bloodbath in eliminating all the imposters. He discovers that Xue Qianxun is also one of the imposters and seriously injures her in anger. Dongfang Bubai plans to unite the wulin once more but Gu Changfeng attempts to stop him and leads the imperial navy to fight him. Dongfang Bubai emerges victorious and Xue Qianxun sacrifices herself to save him. Dongfang Bubai realises his mistake and embraces his dead lover as he retires from the jianghu once more.