To improve the magnetostrictive displacement sensor’s performance, this study designs a sensor signal processing system, by analyzing the generation mechanism of elastic wave. In this system, a differential piezoelectric ceramic pick-up is designed based on the piezoelectric effect of piezoelectric ceramics. By designing amplifying circuit and filter circuit reasonably, and using double magnet in peak detection to compensate the temperature, signal to noise ratio (SNR) is improved and temperature drift is controlled effectively. The experimental results show that this method of signal processing is effectively improve sensor performance, and is significantly in the research and application of magnetostrictive displacement sensor.