The origin of the town's name is unclear, with some people claiming it to be a variation on "straight ford" while many others believe it derives from Stratford-on-Avon from England, William Shakespeare's home town. Locals have embraced the connection with Shakespeare and a Shakespeare on the River Festival has been a successful annual event since 1989, incorporating works of Shakespeare and modern Australian plays. In 1998 the town formally became a member of the Stratford Sister Cities program to promote friendship and cultural exchange between participating countries. Participation is restricted to towns called "Stratford" that have a Shakespeare Theatre or Festival.
The River Avon has a local reputation as a source for river polished gemstones, particularly agate, and for rapidly rising during increased rainfall upstream.
Three kilometres south-east of Stratford is a 56-hectare park called Knob Reserve (formerly known as the "Forest of Arden"), part of the Gunai/Kurnai Bataluk Cultural Trail, which winds its way through East Gippsland, highlighting the places of cultural significance to the first inhabitants. There are picnic facilities and an annual country music festival is held at Knob Reserve.
The land around the Avon River was occupied by the Brayakuloong people of the Gunai/Kurnai indigenous nation for thousands of years prior to European settlement. Angus McMillan named the Avon River after the river of the same name in his native Scotland. In 1840 he established a pastoral run at Bushy Creek, north-west of the township. William Odell Raymond established a run in the area in 1842, and built his house, Strathfieldsaye, during 1848-1854. European settlement did not take place without resistance, and in return, massacres were inflicted by Angus McMillan and others on Gunai people, especially between the years of 1840 and 1850.
The township was established in the late 1850s and the Post Office opened on 1 May 1858.
With the 1860s gold rush to the Omeo and Dargo goldfields, the town of Stratford prospered. Historic buildings include the R.S.L. Hall (1866), the Church of Holy Trinity (1868), the Methodist Church (1873), and the Post Office (1884).
In 1863 Rev Friedrich Hagenauer established Ramahyuck Mission on the banks of the Avon River near Lake Wellington to house the Ganai survivors from west and central Gippsland. The name combines "Ramah", the home of Samuel in the First Book of Kings, with "yuck", an Aboriginal term reputedly meaning "our place". The mission sought to discourage all tribal ritual and culture, and replace it with Christian values and European customs. The Mission closed in 1908 and the few remaining residents were moved to Lake Tyers.