Hysteresis is one of the main sources of measurement errors for magnetostrictive displacement sensors ( MDS ). The measurement accuracy of the sensor can be significantly improved by reducing hysteresis. According to the hysteresis characteristics of ferromagnetic materials, the formation process of the displacement hysteresis is analyzed. To address large hysteresis in the short stroke of MDS, the Preisach model is used to describe the input-output relationship of hysteresis system which represents MDS. Then, a software compensation method for hysteresis on this basis is proposed, which linearizes the hysteresis curve piecewise to calculate initial iteration value. The search range of convergence value is determined according to the steady-state error. To solve the problem of the large deviation between the theoretical model and reality within a short distance after the magnetic ring turns, the convergence condition is adjusted near the turning point to improve the accuracy of the compensation method in this area. Experimental results show that the method requires only a few iterations. After compensation, the hysteresis of MDS is reduced to about 1 / 3 of the original value. The nonlinearity is also slightly improved. Without changing the existing sensor structure, this method can quickly and effectively reduce the displacement hysteresis of the sensor. It provides a new solution for the hysteresis compensation of MDS.