Objective To investigate the clinical effect and mechanism of action of Chaishao Erzhi Powder in the treatment of toxic diffuse goiter (Graves' disease), as well as its effect on glutathione peroxidase (GSH-Px) and malondialdehyde (MDA). Methods A total of 60 patients with Graves' disease with liver deficiency and phlegm stagnation were randomly divided into treatment group and control group, with 30 patients in each group. The patients in the control group were given methimazole, and those in the treatment group were given Chaishao Erzhi Powder in addition to the treatment in the control group. The course of treatment was 12 weeks for both groups. The two groups were compared in terms of clinical outcome of traditional Chinese medicine (TCM) syndrome, thyroid function ［free triiodothyronine (FT3), free thyroxine (FT4), and thyroid stimulating hormone (TSH)］, and serum levels of thyrotropin receptor antibody (TRAb), GSH-px, and MDA. Results Compared with the control group, the treatment group had significant reductions in the serum levels of FT3, FT4, and TRAb (P<0.05) and a significant increase in TSH level (P<0.05). Both groups had significantly improved serum levels of GSH-px and MDA after treatment (P<0.05), and the treatment group had significantly greater improvements than the control group (P<0.05). The treatment group had a significantly better clinical outcome of TCM syndrome than the control group (P<0.05). Conclusion Chaishao Erzhi Powder has a good clinical effect in the treatment of Graves' disease, possibly by improving the expression of GSH-px and MDA and regulating the antioxidant level in the body.