A signal processing method of realizing a large-range displacement measurement in a sinusoidal phase-modulating laser diode interferometer is proposed. The method of obtaining the dynamic value of the effective sinusoidal phase-modulating depth is detailed, and the residual amplitude modulation is also taken into account. Numerical simulations and experiments are carried out to compare this method with the traditional one. We prove that, with this method, the sinusoidal phase-modulating laser diode interferometer can realize a centimeter-level displacement measurement range with high precision, which is much better than the traditional method.