Hydraulic actuation system is typical displacement control system whose performance is subjected to random inputs from noise, random disturbance from pump vibration or parameter changes. Through importing the integral item of residual error in different rank, this paper establishes the Proportion-Integral Observer (PIO) that can eliminate the influence of random input, parameter excursion and inherent disturbance and realize the fault diagnosis robustly. In order to reach the high fault coverage and low false alarm, this paper provides twin-threshold and corresponding fault decision-making strategy that not only considers the inherent noise existed in the system but also can manifest the fault information effectively. Application and simulation of hydraulic actuator system indicates that the adaptive fault diagnosis can detect the failure in high precision at the stochastic condition.