The goal of the game is to capture the villains who have escaped from Cloudcracker prison. Long ago, Skylands was ruled by powerful villains called the Doom Raiders who hid out in the Savage Badlands and wreaked havoc over Skylands. They were eventually captured by a group of elite Skylanders called: The Trap Team and were placed in Cloudcracker Prison. Some years later, Kaos, the game's main antagonist, released The Doom Raiders and the other villains by blowing up the prison. As a result, the Trap Team were sent to earth along with crystal traps formed by a material of the prison called Traptanium. During the opening of Skylanders Academy presented by Buzz a remnant of the explosion is seen, and he goes to investigate. Buzz helps the Trap Team catch the Gluper, a giant blob monster, at Soda Springs by using its addiction to soda. Meanwhile, Kaos gathers with the Doom Raiders at his new lair but the Doom Raiders reject him without even listening to his plan due to him failing to stop the Trap Team from recapturing the Gulper. The Doom Raiders leader, The Golden Queen, lets Kaos and his troll butler Glumshanks stay only to come up with a plan of her own. The Trap Team secure intelligence about the Doom Raiders at Know-It-all Island then head to Chompy Mountain, where they battle Chompy Mage and his forces and trap him. Meanwhile, Golden Queen learns of the defeat, with Kaos deciding to take advantage of this to retake control.
The Trap Team are sent to track down Chef Pepper Jack and stop him from stealing the Phoenix Chicken. They hold off the Chef's forces from obtaining an egg to create a Spicy Omelet of Doom. Kaos intervenes to foil his plans but his smoke rocket lets Chef Pepper Jack run away with an egg. Launching an assault on his Zeppelin, The Trap Team trap Chef Pepper Jack. With 3 Doom Raiders down, the remaining Doom Raiders are set to take action, but Golden Queen still wants to build a weapon made of Traptanium in an attempt to get all the gold in Skylands much to Kaos' dismay. He tries to get control but loses and he is given the boot. Realizing he will need the help of The Skylanders, Kaos decides to aid them to get revenge, revealing that the Dreamcatcher (a sadistic yet immature floating head able to manipulate dreams and bring nightmares to life) has been terrorizing a Mabu village in Monster Marsh. They are able to stop her by waking the sleeping townspeople, but she escapes. The Trap Team head to Telescope Towers to prevent her from stealing secrets of Traptanium from the dreams of Mabu scientists, eventually defeating and trapping her though she manages to send the secrets to the Doom Raiders.
Though the secrets were lost, Dr Krankcase, a mad scientist specializing in animating wood into evil robotic minions made of wood, still needs one final piece to the weapon: a large amount of "stinkocity", or bad odor. While The Trap Team manage to stop the main flow of smelly goo, Dr. Krankcase substitutes the goo for cheese, and comes up with a plan to simply bury it and travel forward in time to when it will be unbearable in stench, though this requires a Portal Master. To do so, they reopen Kaos's Wilikin workshop and trap him, but Wolfgang, a rockstar wolf armed with a massive bone harp, abandons Krankcase and leaves him to be trapped by The Trap Team. They track Wolfgang to Time Town, but they arrive too late as Wolfgang has already headed to the far future. Arriving in that time period, they discover that he has completely taken over and constructed "The Big Bad Wolfer", a giant head that amplifies his painful music 10-fold. The Trap Team make their way to the Big Bad Wolfer and shut it down, and defeat Wolfgang. However, the rotten cheese was sent to Golden Queen in the present, and she completes the weapon. She demands her fellow Doom Raiders to be freed, the Trap Team to surrender, and to have all the gold in the world.
The Trap Team and their friends steal a rocket from the Trolls and use it to get to the Skyhighlands, where they find a crystal to locate the Golden Queen's lair. The Trap Team defeat Golden Queen. However, Kaos takes the weapon for himself and absorbs the combined stinkocity and energy from the collected Traptanium, to become much stronger. He then realizes it was not The Skylanders he had to destroy, but the one thing that was always in his way: The Portal Masters, or the player, and sets his eyes on Earth. With both worlds hanging in the balance, The Trap Team make their way through the weapon and battle Kaos who transforms into an enhanced Traptainium version of himself, growing Traptanium swords and raven-like wings. In spite of this, Kaos is finally defeated and put in a Kaos trap. The weapon then overloads and explodes, freeing the trapped cities. The game ends with Buzz and Flynn announcing the official opening of the Skylander Academy.