Theory:

Quixote: Your fears prevent you from hearing or seeing alright but if you refuse to follow me to the battle, stand aside, and I will go on alone.

Sancho: Hold, Sir! come back, I entreat! What madness is this! They are verily but sheep and lambs!

[Don Quixote set spurs to Rozinante and charge into the midst of the sheep. At this the frightened animals flee helter-skelter in all directions, and the shepherds, seeing the cause of their disorder, pursue Don Quixote with a shower of such well-aimed stones that soon he fall wounded to the ground.]

Quixote: Ha haha! Did you see those cowards run? They are right to fear Don Quixote!

[The local peasants all think Don Quixote is crazy. They laugh and taunt as he pass.]

Peasant $$1$$: Look, it’s Don Quixote, the madman!

Peasant $$2$$: Hey, Sir Knight, what kind of beast did you defeat this time?

Peasant $$3$$: Did you finally get those evil sheep? Ha haha!

All: Hail the mad knight, Don Quixote! Ha haha!

[Don Quixote does not understand, and think the people are cheering for him.]

Quixote: Sancho, look! See how the people welcome us! They must have heard of our great deeds!

Sancho: Oh, no. Master, listen very carefully, they are not welcoming us, they are mocking you.

Quixote: Sancho, Sancho, when will you see the truth?

Sancho: Enough is enough. Please Master.

Quixote: Very well, we shall speak no more of this today. But we need more adventures Sancho.

Sancho: Yes Master. We need more adventures.

[Return to his estate Don Quixote realize that all his adventures were simply a product of his imagination. Don Quixote never embarrass himself further by going on any more quests but his house will always be full of children to whom he would tell the most fantastic stories about Knights, Squires and Noble quests.

They lived happily together going on many more adventures in their imagination.]
Explanation:

Don said that Sancho's fear was not allowing him to see the army and that he was going to charge at the opposing army. Sancho warned him again that they were just sheep and lambs and that he should not charge at them. Don continued to charge at the sheep and lambs. So, all the sheep and lambs got scared and started running here and there. The shepherds saw the sheep running and got annoyed. They took stones and aimed Don, and he fell from the horse and was wounded.

But Don did not subside with this. He was laughing, saying that he could see the army scatter away as they were cowards. They were all scared of Don Quixote. All the local farmers thought that Don was a disoriented person, and they made fun of him. One peasant said to see Don Quixote, the madman. The second farmer asked Don the soldier which monster did he defeat this time. The third peasant made fun of him and said did he finally got those evil sheep. All together made fun of him and said Hail the mad knight, Don Quixote!

Don never understood what the farmers meant and was happy thinking that everyone was praising him. He told Sancho that their names had reached the peasants and to see how they were greeting him. Sancho did not like all these comments. He asked Don to listen carefully. The farmers were not saluting them, but they were making fun of them. Don was still not ready to agree and taunted Sancho asking if he would see the truth ever. Sancho had enough of all this, and he told his master to make some sense. Don said that he did not want to speak about that adventure anymore, but he wanted to go for more exploits. Sancho listened to his master's words.

Finally, when Don came back to his bungalow, he realized that all this was just his imagination. From then on, he never went out on adventures, but he would do all his exploits at his house with children and tell them varieties of stories about soldiers, noble people, etc. The children and Don enjoyed his adventures together in their imagination.

Meanings of difficult words:

 Numbers Word Meanings 1. Helter-skelter Hastily. 2. Taunt Insult. 3. Entreat Ask someone earnestly. 4. Quests Search.
Reference:
State Council of Educational Research and Training (2019). Term-2 English Standard-7. Adventures of  Don Quixote -  Miguel de Cervantes. (pp. 83-86). Published by the Tamil Nadu Textbook and Educational Services Corporation.