James Stanley was born at Knowsley in Lancashire in 1607, the eldest son of William Stanley, 6th Earl of Derby, and Elizabeth de Vere, daughter of the 17th Earl of Oxford. Through his paternal grandmother he was a great-great-grandson of Mary Tudor, Queen of France, and Charles Brandon, 1st Duke of Suffolk, making him a direct descendant of Henry VII. As heir to the earldom he held the courtesy title Baron Strange. On his father's death on 29 September 1642 he inherited the earldom of Derby and with it the lordship of Mann, a title granted to the Stanley family by Henry IV in 1405.

Stanley first visited the Isle of Man in 1628 and made occasional visits through the 1630s, effectively governing the Island on behalf of his elderly father, who had retired to Bidston Hall in Cheshire. He personally presided at Tynwald in 1637. He took a close interest in the governance of his island lordship, spending extended periods on the Isle of Man - unusual among the Stanleys. He arrived on the Island in June 1643 and wrote from the summit of South Barrule that he could see England, Scotland, Ireland and Wales, remarking that no place under heaven could afford such a prospect. He wrote detailed observations on managing the Manx people, including the use of informants and watchers, and pursued a policy of converting customary land tenures to leaseholds. He appointed Edward Christian as Governor, then imprisoned him; appointed John Greenhalgh as Governor; and appointed William Christian (Illiam Dhone) as both Governor and Receiver-General - the only Manx-born person ever to hold the title of Governor. The Manx people later referred to him as "the Great Stanley."

When the English Civil War broke out in 1642, Stanley attended the King's council at York and offered to raise 10,000 men at his own expense for Charles I. The court stripped him of his commissions for Cheshire and North Wales and appointed Lord Rivers as a counterweight. Stanley raised approximately 3,000 foot and 500 horse and fortified his great seat at Lathom House. His early Lancashire campaign was characterised by personal courage and aggressive action. He took Lancaster by assault on 18 March 1643 and Preston on 20 March. After Preston he proposed the decisive blow against Manchester, the Parliamentary stronghold, but Lord Molyneux was recalled to Oxford by the King's command and the other Royalist officers withdrew their forces. Stanley begged Molyneux to stay four days; he refused. Without a field army to support the garrisons, Wigan fell and the gains unravelled. The campaign finally collapsed at the Battle of Whalley on 20 April 1643, where Stanley and the Lancashire commanders were routed. Stanley returned to the Isle of Man, where an impending rebellion required his attention.

When news reached him that Charlotte and his family were besieged by Parliamentary forces at Lathom House, Stanley returned to England. Prince Rupert, marching north through Lancashire with approximately 10,000 troops, arrived before Bolton on 28 May 1644. Rigby, who had been besieging Charlotte at Lathom, had retreated to Bolton with his forces when he heard of Rupert's advance. Stanley knew the men inside the walls were the same men who had been besieging his wife and family. The first assault was repulsed with 200 Royalist casualties. Stanley volunteered to lead the second attack, declaring he would either enter the place or leave his body in the ditch. He was the first man through the defences at a place called the Private Acres. After resistance ended, Rupert gave the no-quarter order and declared the town the soldiers' reward. Approximately 1,600 defenders and inhabitants were killed. No source places Derby in the second phase of violence after the fighting ended, but the massacre was blamed on him and would be used against him at his trial seven years later. The day after the storming, Rupert commissioned Sir Richard Crane to carry twenty-two captured battle colours to Charlotte at Lathom. Derby almost certainly rode with Crane. Charlotte left for the Isle of Man on 30 July 1644 with their six children.

From the Island, Stanley coordinated with Lancashire Royalists through an agent named Isaac Berkenhead, building a conspiracy to raise the county for Charles II. In March 1651, Berkenhead was captured and turned by Parliament. On a single day, 15 March, the Council of State assembled a naval squadron of twelve ships, ordered arrests across Lancashire, Cheshire and North Wales, dispatched troops, and raised a Yorkshire regiment - all from Berkenhead's intelligence. Over the following months, Parliament systematically dismantled the conspiracy: the arms were seized, the named conspirators arrested, and the networks of communication broken. On 6 August 1651, Stanley signed a commission giving Charlotte formal authority to govern the Island in his absence and sailed for the mainland. He landed at Wyrewater on 15 August into an empty county. The musters he had ordered were never held. The support he expected had been destroyed months before he sailed. The force he assembled numbered approximately 600 horse and 800-900 foot, including Manx fishermen and farmers who had sailed with him from the Island - a fraction of the 6,000 foot and 1,300 horse projected by the council of war. At the Battle of Wigan Lane on 25 August, Sir Thomas Tyldesley was killed and Derby escaped with his beaver showing thirteen cuts. At the Battle of Worcester on 3 September, with the Royalist position collapsing, Derby urged the King to escape and led the party that brought Charles to safety through St Martin's Gate. Derby took the King to Whiteladies and then to Boscobel House in Shropshire, a manor belonging to the Catholic Giffard family, whose tenants the Penderels he knew could be trusted. It was at Boscobel that Charles II hid in the oak tree with Major Carlis while Parliamentary soldiers searched the woods below - the episode that became one of the most famous stories of the Civil Wars and saved the life of the future King. Derby then rode north to draw the pursuit, was captured by Captain Oliver Edge, and was given quarter.

Stanley was held at Chester Castle. The court martial that sat on 29 September was presided over by Colonel Mackworth, with Colonels Duckenfield, Birch, and Bradshaw among the commission. Three of those pressing for the Earl's destruction had personal grievances against him. Stanley was allowed neither counsel nor law books and mounted his own legal defence on the binding nature of quarter under the laws of war.

On 13 and 14 October, Stanley met three of his children in Chester Castle - his eldest son Lord Strange, and his two younger daughters Lady Katherine (c.20) and Lady Amelia (c.18), who had been seized at Knowsley by Colonel Birch and held under restraint since 1649. His other children were on the Isle of Man with Charlotte. On the road to Bolton, near Hoole Heath, the cavalcade paused and Stanley dismounted to embrace Katherine and Amelia, who were waiting in a coach. He knelt and prayed with them on the roadside before the soldiers moved him on. On 14 October, his letter from Chester was read in the Commons. Only thirty-eight members were present, below the quorum of forty. The vote to read his petition passed twenty-two to sixteen, but the petition was never acted upon. Draper's account claims Cromwell and Bradshaw walked out with eight or nine of their confederates to break the quorum and prevent a clemency vote from proceeding.

Stanley was executed at Bolton on 15 October 1651. His scaffold was built partly from timber brought from the ruins of Lathom House. His scaffold speech was recorded in shorthand by James Roscow. He was buried at Ormskirk.