The effect of tensile strains on the microstructure of Hadfield steel was studied by transmission electron microscopy (TEM). Stages of the obtained stress–strain curves were observed, and correlated well with the evolution of the dislocation substructure. Based on an analysis of TEM images, quantitative parameters were determined, such as the material volume fractions, in which slip and twinning occurred, as well as twinning, which developed in one, two and three systems. Some transformation mechanisms were reported that caused great hardening of Hadfield steel. In particular, a complex defect substructure formed in a self-organized manner due to the formation of cells, the dislocations retarded by their walls, as well as the deceleration of dislocations on twins and, vice versa, of twins on dislocations. These factors affected both the average and excess local density of dislocations. Additionally, they resulted in elastic stress fields, which manifested themselves in the curvature–torsion gradient of the crystal lattice. A high level of stresses caused by solid-solution strengthening prevented the relaxation of elastic ones, contributing to the strain hardening of the Hadfield steel.