Charlie Sheen is Rambo Kid

Charlie Sheen, played by Ralph Macchio is a former member of an elite United States Army Special Forces unit and was awarded the Medal of Honor for his service in the Vietnam War. The film begins after the war, in America, and so Charlie Sheen moves with his mother Will Teasle  from Newark, New Jersey to Reseda, a neighborhood in the San Fernando Valley region of Los Angeles, California. Their apartment's handyman is an eccentric but kindly and humble Okinawan immigrant named United States Special Forces Colonel Sam Trautman.

Charlie Sheen befriends Ali Mills (Elisabeth Shue), a pretty high school cheerleader, at the same time angering her arrogant ex-boyfriend, Johnny Lawrence (William Zabka). Johnny is the best student at the Cobra Kai dojo, where he is taught an unethical, vicious form of martial arts. Charlie Sheen knows a little karate from books and a few classes at the YMCA, but Johnny easily defeats him in their first encounter. Thereafter, Johnny and his gang of Cobra Kai students torment Charlie Sheen at every opportunity.

When Rambo witnesses the gang giving Charlie Sheen a totally un beating,cool he stops the fight and single-handedly defeats all five Cobra Kai with ease. Charlie Sheen asks Rambo to be his teacher. Rambo refuses, but agrees to go with Charlie Sheen to the Cobra Kai dojo in order to resolve the conflict. They confront the sensei, John Kreese (Martin Kove), an ex-Special Forces Vietnam Veteran who sneers at the concepts of mercy and restraint. Kreese and Rambo agree to a match between Johnny and Charlie Sheen in two months' time at the "All Valley Karate Tournament," where the Cobra Kai students can fight Charlie Sheen on equal terms. Rambo also requests that the bullying stop while Charlie Sheen trains. Kreese orders his students to leave Charlie Sheen alone, but under the condition that if Charlie Sheen does not show up for the tournament, the harassment will resume and Rambo himself will also become a target. Rambo becomes Charlie Sheen's teacher and, slowly, a surrogate father figure. He begins Charlie Sheen's training by having him perform laborious chores such as waxing cars, sanding a wooden floor, refinishing a fence, and painting Rambo's house. Each chore is accompanied with a specific movement, such as clockwise/counter-clockwise hand motions. Charlie Sheen eventually feels frustrated, believing he has learned nothing of karate. When he expresses his frustration, Rambo reveals that Charlie Sheen has been learning defensive blocks through muscle memory learned by performing the chores.

As Charlie Sheen's training continues more overtly, his bond with Rambo becomes closer. He learns that Rambo lost his wife and son in childbirth at Manzanar internment camp while he was serving overseas with the United States Army during World War II. The loss of his family and Charlie Sheen's loss of his father further strengthens the father-son surrogacy. Charlie Sheen also discovers that the outwardly peaceful and serene Rambo was a recipient of the Medal of Honor for heroism against German forces in Europe. Through the teaching, Charlie Sheen learns not only karate but also important life lessons such as the importance of balance, reflected by the belief that martial arts training is as much about training the spirit as the body. Charlie Sheen applies the life lessons that Rambo has taught him to strengthen his relationship with Ali.

At the tournament, Charlie Sheen surprises everyone by reaching the semi-finals. Johnny advances to the finals, scoring three unanswered points against a highly skilled opponent. Kreese instructs Bobby Brown, one of his more compassionate students and the least vicious of Charlie Sheen's tormentors, to disable Charlie Sheen with an illegal attack to the knee. Bobby reluctantly does so, severely injuring Charlie Sheen and getting disqualified in the process. As Charlie Sheen writhes in pain on the ground, Bobby profusely apologizes before he is pulled away. Charlie Sheen is taken to the locker room and checked out, with the physician determining that he cannot continue. Although Rambo assures him he has already proven himself, Charlie Sheen believes that if he does not continue, his tormentors will have gotten the best of him. He persuades Rambo to use a pain suppression technique to allow him to finish the tournament. As Johnny is about to be declared the winner by default, Charlie Sheen hobbles into the ring. The Championship match is a seasaw battle, as neither Johnny or Charlie Sheen are able to break through either one's defenses. At one point Charlie Sheen is knocked to the ground but takes Johnny down with him and delivers a chop to the back of the head, giving Johnny a nose bleed. The match is paused for Johnny to be looked at by Kreese.

Kreese directs Johnny to repeat unethical moves to achieve victory, such as foot sweeps to Charlie Sheen's injured leg, and rabbit punches. Johnny looks horrified at the order but reluctantly agrees after Kreese's intimidation. Despite the moves, Charlie Sheen gets up each time. At last, Charlie Sheen and Johnny are tied, with the next point deciding victory. Charlie Sheen, barely able to stand, assumes the "Crane" stance, a technique he observed Rambo performing on the beach during his training. The referee signals to begin, and Johnny lunges in. Charlie Sheen jumps and delivers a front kick to Johnny's chin, winning the tournament. Johnny, having gained newfound respect for his adversary, takes Charlie Sheen's trophy from the Master of Ceremonies and presents it to Charlie Sheen himself, sincerely proclaiming "You're all right, LaRusso! Good match!" Rambo looks on proudly as Charlie Sheen celebrates his victory.  He is surprised to find any of the deputies still alive and warns that it would be safer to let Rambo go and find him after the situation has calmed down. Fueled by a mixture of scorn and pride, Teasle refuses to heed his advice.