Tournaments can appear in various forms at any time. Here, I will give some details on the Arena-Tournament. Anyone can take part, there are three winners. Players are classified into four groups: < lvl 100, < lvl 1000, < lvl 10000, and all above lvl 10000. The different levels imply different rewards, but also a difference in the quest-path and difficulty. Usually the first winner gets a unique item.
When a tournaments is announced, you walk around in the castle or in the near surroundings and look for an Arena Ticket. This will let you pass the barrier to the portal in castle. But before doing that, you want to show your ticket to the flower girl (also in castle). She will give you a rose of some color. The portal leads you into the inner arena. Step through the Flames and look for the NPC of your rose's color who will guide you through the tournament.
The last task in this quest is always to defeat some gladiator in a corner of the map. Giving his helm to the knave you will receive a Flag of your color. In the center area you will also find the judge who takes your flag and provides you with a medal. Now you give this medal to the flower girl outside the arena and see what you get. You may leave the arena anytime during the tournament using the central portal.
After all three winners have received there prizes, everyone gets moved out of the arena. The portal vanishes and all quest items disappear from inventories