Aiming at the increasing demand for signal high-precision solution methods of grating interferometric displacement sensors, an improved method of displacement solution based on ellipse fitting compensation and arctangent algorithm was proposed. The estimation of signal error parameters was realized by Fourier transform and normalized elliptic parameter fitting method, the orthogonal compensation of the signal with errors was carried out by constructing a linear error compensation model, and the signal was linearized with the arctangent algorithm to finally achieve high-precision displacement solution readout. The simulation results of Matlab show that this method is highly effective for the signal orthogonal compensation effects, and the maximum relative error of displacement solution for linearization is less than 0.2%, which provides an effective way and method to improve the displacement solution precision of grating interferometric sensors.