This paper presents an approach for data‐driven design of fault diagnosis system. The proposed fault diagnosis scheme consists of an adaptive residual generator and a bank of isolation observers, whose parameters are directly identified from the process data without identification of complete process model. To deal with normal variations in the process, the parameters of residual generator are online updated by standard adaptive technique to achieve reliable fault detection performance. After a fault is successfully detected, the isolation scheme will be activated, in which each isolation observer serves as an indicator corresponding to occurrence of a particular type of fault in the process. The thresholds can be determined analytically or through estimating the probability density function of related variables. To illustrate the performance of proposed fault diagnosis approach, a laboratory‐scale three‐tank system is finally utilized. It shows that the proposed data‐driven scheme is efficient to deal with applications, whose analytical process models are unavailable. Especially, for the large‐scale plants, whose physical models are generally difficult to be established, the proposed approach may offer an effective alternative solution for process monitoring.