In 1984, 17-year-old Daniel LaRusso and his mother Lucille move from Newark, New Jersey, to Reseda, Los Angeles, California. Their apartment's handyman is an eccentric, but kind and humble Okinawan immigrant named Mr. Miyagi (Character).
At a beach party, Daniel befriends Ali Mills, a high school cheerleader, drawing the attention of her arrogant ex-boyfriend Johnny Lawrence, a black belt and the top student from the Cobra Kai dojo, which teaches an aggressive form of karate. Johnny and his Cobra Kai gang (Bobby Brown, Tommy, Jimmy, and Dutch) continually bully Daniel. On Halloween, after Daniel sprays water on Johnny with a hose as payback, he and his gang pursue Daniel down the street and brutally beat him, until Mr. Miyagi intervenes and easily defeats them.
Amazed, Daniel asks Mr. Miyagi to teach him karate. He declines but agrees to accompany Daniel to Cobra Kai to resolve the conflict. They meet the sensei, John Kreese, an ex-Special Forces Vietnam veteran who callously dismisses the peace offering. Miyagi then proposes that Daniel enter the Under 18 All-Valley Karate Championships to compete against Kreese’s students on equal terms, and requests that the bullying cease while he trains. Kreese agrees to the terms but warns that if Daniel does not show up for the tournament, the harassment will continue for both of them.
Daniel's training starts with days of menial chores that seemingly only serve to make him Miyagi's slave. When he becomes frustrated, Miyagi demonstrates that repetition of these chores have helped him to learn defensive blocks through muscle memory. Their bond develops, and Miyagi opens up to Daniel about his life, including the dual loss of his wife and son in childbirth at the Manzanar internment camp while he was serving with the 442nd Infantry Regiment during World War II in Europe, where he received the Medal of Honor.
Through Mr. Miyagi's teaching, Daniel learns not only karate but also important life lessons such as the importance of personal balance, reflected in the principle that martial arts training is as much about training the spirit as the body. Daniel applies the life lessons Miyagi has taught him to strengthen his relationship with Ali. On Daniel's 18th birthday, Miyagi gives him a Karate gi for the tournament and one of his own cars.
At the tournament, Daniel surprises the audience and competitors by reaching the semi-finals. Johnny advances to the finals, scoring three unanswered points against Darryl Vidal. Kreese instructs his second-best student, Bobby Brown, one of his more compassionate students and the least vicious of Daniel's tormentors, to disable Daniel with an illegal attack to the knee. Bobby reluctantly does so, severely injuring Daniel and getting himself disqualified in the process.
Daniel is taken to the locker room, where the physician determines that he cannot continue. However, he believes that if he quits, his tormentors will have gotten the best of him, so he convinces Miyagi to use a pain suppression technique to help him continue. As Johnny is about to be declared the winner by default, Daniel returns to fight. The match is a seesaw battle, with neither able to break through the other's defense.
The match is halted when Daniel uses a scissor-leg technique to trip Johnny, delivering a blow to the back of his head and giving Johnny a nosebleed. Kreese directs Johnny to sweep Daniel's injured leg – an unethical move. Johnny looks horrified at the order, but reluctantly agrees. As the match resumes and the score is tied 2–2, Johnny seizes Daniel's leg and deals a vicious elbow, doing further damage. Daniel, standing with difficulty, assumes the "Crane" stance, a technique he observed Mr. Miyagi performing on a beach. Johnny lunges toward Daniel, who jumps and executes a front kick to Johnny's face, scoring the winning point and becoming the new champion.
Johnny, having gained newfound respect for his nemesis, presents the trophy to Daniel himself, as Daniel is carried off by an enthusiastic crowd while Miyagi looks on proudly.