Background Ferroptosis has gained significant attention from oncologists as a vital outcome of oxidative stress. The aim of this study was to develop a prognostic signature that was based on the ferroptosis-related genes (FRGs) for osteosarcoma patients and explore their specific role in osteosarcoma. Methods The training cohort dataset was extracted from the Therapeutically Applicable Research to Generate Effective Treatments (TARGET) database. Different techniques like the univariate Cox regression, least absolute shrinkage and selection operator (LASSO) regression, multivariate Cox regression analyses, and the Kaplan-Meier (KM) survival analyses were utilized to develop a prognostic signature. Then, the intrinsic relationship between the developed gene signature and the infiltration levels of the immune cells was further investigated. An external validation dataset from the Gene Expression Omnibus (GEO) database was employed to assess the predictive ability of the developed gene signature. Subsequently, the specific function of potential FRG in affecting the oxidative stress reaction and ferroptosis of osteosarcoma cells was identified. Results A prognostic signature based on 5 FRGs (CBS, MUC1, ATG7, SOCS1, and PEBP1) was developed, and the patients were classified into the low- and high-risk groups (categories). High-risk patients displayed poor overall survival outcomes. The risk level was seen to be an independent risk factor for determining the prognosis of osteosarcoma patients (p < 0.001, hazard ratio: 7.457, 95% CI: 3.302-16.837). Additionally, the risk level was associated with immune function, which might affect the survival status of osteosarcoma patients. Moreover, the findings of the study indicated that the expression of ATG7 was related to the regulation of oxidative stress in osteosarcoma. Silencing the ATG7 gene promoted the proliferation and migration in osteosarcoma cells, suppressing the oxidative stress and ferroptosis process. Conclusions A novel FRG signature was developed in this study to predict the prognosis of osteosarcoma patients. The results indicated that ATG7 might regulate the process of oxidative stress and ferroptosis in osteosarcoma cells and could be used as a potential target to develop therapeutic strategies for treating osteosarcoma.