Interferometric signals of a homodyne Michelson interferometer appear in sinusoidal forms. In this investigation, new concepts for signal processing of Michelson interferometer are demonstrated. With the utilization of detection of position sensitive detector (PSD) and by the procedure of differential signals and the characteristic of symmetric waveform, a compact signal processing for homodyne Michelson interferometer has been developed. Its advantages include simplified procedure, fast processing and few electronic hardware. For experiment tests of the signal processing, a conventional homodyne Michelson interferometer has been constructed. Major components of the interferometer consist of laser light source, beam splitter, mirrors, PSD and piezo transducer for driving measurement mirror. To verify the performance of the signal processing, a commercial nanopositioning stage as reference standard has been utilized for comparison measurements. Through theoretical analysis and experiment tests, it can be proved that by the developed signal processing an interferometer possesses the optical resolution of 79 nm. With support of the developed signal processing, interferometers will possess the benefits of simply structure, few components and lower cost.