In order to win this match you have to really cheese it as best you can. Normally you have almost no chance. I had 3 of my 4 characters wiped in the first turn when I fought this battle. I was eventually able to win but the cheese was quite strong with this one.
On a side note god I hope they change the story for this encounter. The fact that the red dragon knight sees the great weapon right in front of him and says ..... hmmm know what I should do leave. Frankly my brain started hurting. I really hope that this is just a test ground for now and it will not play out like this going forward. If not the writers need to go back to High School English class to learn the basics of writing.