Magnetostrictive displacement measurement is the main method used to measure the level of a liquid. Many studies have been performed to improve the performance of the system and circuit of the magnetostrictive displacement measurement. However, we found that signal processing is also an important factor in the displacement system. To improve the signal to noise ratio and stability of the magnetostrictive displacement sensor, in this paper we presents coils wound around a waveguide wire as the transmitting and receiving sensor. Both simulation and experiment were performed on the magnetostrictive displacement sensor. We also introduce three methods that could be used to perform signal processing. Results show that the method combination of auto-correlation processing and pike value is the best way to deals with the signal. In addition, the error of the designed magnetostrictive displacement measurement is 6 mm.