I knew I forgot something. Right now you can only return with the portable teleporter in your inventory, I forgot to add a way to go back to the first two towns.
You can't improve your skills but you can buy better gear and weapons, craft them yourself and even upgrade your gear with scrolls and runestones.
I don't know why he isn't fighting back, because he is supposed to. But to beat the Blue Dragon master you need to learn the trioken technique first, because he is simply too fast. You can learn the technique by beating the Purple Dragon master.
If you talk with the guy in front of the TV he will give you hints on how to beat everyone of them.
But if you still can't figure it out: