Mystic Square allows the player to select from among four unique protagonists, each hailing from one of the 2 prior danmaku shooting games in the series. Series mainstays Reimu Hakurei and Marisa Kirisame are joined by former enemies Mima and Yuuka Kazami for a journey reaching to the depths of the Makai. Mystic Square also marks the first appearance of Alice Margatroid as an opponent, who later stages a comeback in Perfect Cherry Blossom.

Although limited by the PC-98 hardware, Mystic Square is the most refined of the PC-98 Touhou titles, and features gameplay quite similar to Windows Touhou games. It employs a variant of Lotus Land Story's Dream Bonus system, rewarding the player for taking risks (i.e. collecting point items from the top of the field area). Its rank system, however, is more lenient than Lotus Land Story's.

For no apparent reason, large quantities of demons and youkai begin to travel from Makai, the world of demons, to Gensokyo, swamping the land and leaving Reimu Hakurei with a lot of extermination to do. Frustrated, Reimu tracks the source of the invasion to "The Cave in Which the Door to Makai is Said to Be," which lies in the mountains behind the Hakurei Shrine. Reimu decides that it is her duty as a shrine maiden to root out the cause of this mess. Unbeknownst to her, Marisa Kirisame has learned of her plans and decides to follow along with the hope of discovering some unique powers to steal within Makai. Elsewhere, Mima, the evil spirit of the Hakurei Shrine, and Yuuka Kazami, the youkai, decide to travel to Makai as well, although they have their own reasons for doing so.

Within the cave, the heroine encounters the guardian of the gateway to Makai, Sara, and dispatches her with ease before beginning a high-speed flight through the boundary between worlds. Therein the heroine happens across a demon traveling in the opposite direction named Louise and crushes her as well. The heroine then arrives in Makai above a massive dark city, where she is confronted by Alice Margatroid, who attacks her with the help of her living dolls. After defeating her, the heroine flies away from the city and toward a grim fortress that rises up in distance. Along the way the witches Yuki and Mai appear and attempt to impede her progress, ultimately to little effect.

Entering the fortress Pandæmonium, the heroine soars past fantastic crystal designs while battling through legions of enemies. At the top she is met by a strange individual named Shinki who politely informs her that the demon invasion is entirely the fault of a civilian travel agency that is arranging tours of Gensokyo and that it lies outside of her jurisdiction. Before the protagonist can inquire as to the meaning of this they are interrupted by Yumeko, who adamantly insists that Shinki retire so that she may dispose of their uninvited guest. After defeating the maid, the protagonist meets Shinki again, who now explains that she is actually the god and creator of Makai itself. She promises to look into the tourist issue, but only after severely punishing the heroine for disrupting her realm so. This final battle is extraordinarily violent and Shinki's tremendous power leaves much of Makai in flames.