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Nightmare difficulty will only unlock once you complete the game. This means that you will need a minimum of two play throughs to fully complete Alan Wake. The difficulty here isn't a big leap, the enemies will take the same amount of hits as on Hard but they'll do more damage to you. There is also less ammo. My advice is to use Flares to make the Taken back off, and then run; every opportunity you get. Try not to fight unless you have absolutely no other choice. The only collectibles that you should be going for during your Nightmare play through are the Nightmare manuscripts, and they shouldn't be far out of the way. So conserve ammo, dodge and run.