Go straight to Level 6 to learn the basics of this game.
Run to the back of the map, thru the trees, and then run into the church building as soon as possible to avoid the dragon breathe. It's completely dark in here so just swing wildly. That smashes the bottle. So you now have the ability to heal 3 times that resets every time you load a level.

You should be able to run around the perimeter of level 3 and avoid waking dragon entirely.

Other times, just try to stand at the edge of the dragon flames if you can't get further away.
Hit the R key to heal if your red health bar drops.
Don't waste your time with the hordes.