Dr. Stephen Strange is one of the most gifted surgeons in medicine, however, he is also highly arrogant and dismissive of his colleagues. While driving home from the hospital one night, he notices Baron Mordo and his allies slaying a monster – notable because they are hidden from view by one of Wong's spells. An unbelieving Strange dismisses it as a stress-related hallucination. The next day, he is visited by the hospital's administrator Oliver who states that Dr. Gina Atwater has problems with him. He then speaks with Dr. Atwater and discusses her case of a child – one of many – who is suffering from dangerous nightmares. Seeing the children causes Stephen to flash back to when his sister April had a headache similar to the ones the children have been having. The conversation also reveals that the two doctors have had a romantic relationship in the past. When touching one child, he sees an image of a demonic skull-face laughing while engulfed in flames and promptly leaves, telling Gina that there is nothing he can do for the children.
While driving home, Stephen again sees the vision of flames with a burning face in them and swerves his car to avoid ghostly children in the road, careening off the cliffside. As a result of the crash, his hands are left shattered and useless. Spending all of his fortune and life savings in pursuit of a way to fix his fractured hands, the dejected doctor believes all is lost until his suicide attempt is thwarted by Wong, who recommends the Ancient One to offer him hope and healing in Tibet.
After begging Gina to help him get to Tibet and then undertaking a grueling hike up into the Himalayas, Stephen begins his training at a hidden monastery under the tutelage of the Ancient One — a diminutive old man. Soon after Strange arrives, the other students leave to combat a pack of wolf-like creatures in Central Park. Not long after, the Ancient One is told by Wong and Baron Mordo that some of the students died during the conflict. The conversation indicates that the number of assaults by mystical creatures has been growing recently. After several days of scrubbing floors and performing manual labor, Stephen is considering giving up and departs the monastery. As he walks through the snow, however, he flashbacks to a previous failure — becoming his sister's doctor and attempting to remove the brain tumor causing her headaches (in reality, doctors are not permitted to treat family members, as they are too emotionally attached). During the procedure, April died and Strange has always blamed himself. The Ancient One appears in Stephen's mind and convinces him to let go of this past guilt and return to his training.
The next day the Ancient One detects two Chinous (reptilian monsters the size of a small house) approaching the Sanctuary and orders Baron Mordo to kill them one at a time. However, the arrogant Mordo disobeys and leads two separate teams to take them on. As a result, several of the weaker students are killed before the beasts are defeated. Later as the Ancient One mourns the loss of his disciples, he scolds Baron Mordo for his disobedience and tells him that he will never inherit the title of Sorcerer Supreme from the old master, but instead must train Doctor Strange — the true heir to the position. An angered Mordo later spars with Stephen, escalating the mock-fight into a deadly contest of skills. During the fight, Stephen instinctually absorbs Mordo's spell and deflects the energy back towards him. An enraged Mordo lunges to kill him, but Wong intervenes and tells Stephen that he will be taking over the training. A dejected Mordo leaves, now with true hatred in his eyes for Strange.
Later Stephen follows the Ancient One, Wong, Baron Mordo, and the few other remaining students to the Sanctum Sanctorum - a nexus between realities and dimensions that appear from the outside as a townhouse in New York City. The Ancient One then tells them about Dormammu, an ancient being that wishes to rule all worlds — especially Earth. Thousands of years ago after his previous bid at conquest, the Ancient One trapped him in a dimension of limbo. Upon seeing the visage of Dormammu, Stephen recognizes it as the burning face and realizes that the demon is using children's dreams to enter Earth. Doctor Strange returns to the hospital and puts Gina to sleep. He then searches her computer to find out how widespread the children's comas are and to attempt to wake them. He awakens patient after patient to prevent Dormammu from entering Earth. Mordo also enters a child's dream and makes a deal with Dormammu, pledging to serve him in exchange for dominion as the Sorcerer Supreme. Dormammu takes over the minds of the remaining children as Mordo attacks Doctor Strange in the physical realm. Wong appears, however, and manages to save him.
As this is going on at the hospital, the Ancient One and his three remaining students attempt to ward off a swarm of Wing Marks — vicious flying mouths capable of stripping a person to the bone in seconds. All of the followers are killed and the Ancient One is left greatly weakened due to both exertion and age. The traitorous Mordo then arrives to attack the Ancient One. Doctor Strange and Wong arrive at the Sanctum to find the Ancient One dead. Wong gives Doctor Strange the Eye of Agamotto — a powerful symbol of the office of Sorcerer Supreme — and states that it is Doctor Strange's destiny. Strange and Wong then confront Baron Mordo. As Wong fights Mordo, he is wounded in battle, but Mordo is repelled by Doctor Strange. Doctor Strange then fights him as Dormammu begins his emergence.
Dormammu immediately devours Mordo and steals the Eye of Agamotto as he makes his way to the Sanctum Sanctorum. Doctor Strange confronts Dormammu who begins to overwhelm the new sorcerer as he unleashes his monsters around the world. The wounded Wong, watching from nearby, reminds Stephen of his experience sparring with Mordo and the Doctor then absorbs the pure magic the demon is blasting him with. Since the demon himself is made of pure magic, he soon vanishes into nothing after pouring his power into Strange. An astonished Wong states that he didn't expect the Doctor to actually absorb Dormammu but it will work.
Later, as they return to the Sanctum, Wong tells Doctor Strange that Stephen's primary purpose as the Sorcerer Supreme is to protect the realm of Earth from mystical attacks such as the one they just experienced. Stephen later appears in Gina's dream, surprising her with his humbling change in attitude and reassures her that all will be well with the children. Now dressed in the robes of his office, Doctor Strange visits his sister's grave to say goodbye and is told by Wong that they have new potential students for Strange to train. One of those who shows real potential is a girl named "Clea", as they close the door while entering the Sanctum.