I think you need to finish the ToS questline first then you just have to sleep for a few days and you will get a nightmare... after that how to do the nightmares should all be written inside your journal.
If you've done the ToS questline already just spam sleep until you get the nightmare... that should do it as it is random % based.
Just like a mini rundown of what you might need to do (without spoilers). You have to warn the lizards about your nightmare and then you do some small quest for the lizards, then you have to sleep and someone will appear in your dreams and then repeat sleeping and you get a nightmare choice, which is followed up by the lizard celebration party at the waterfalls.