In this paper, we demonstrated an improved laser self-mixing grating interferometer (SMGI) with auto-collimation design which can avoid the disturbance from the light feedback of the zero-order diffraction beam. In order to obtain higher optical subdivision, SMGI with multiple-diffraction is implemented. Both theoretical analysis and experimental work show that the proposed system for displacement measurement can achieve high sensitivity and low measurement uncertainty. Using the proposed system, different forms of micro-displacement signals applied on the target (grating) have been reconstructed with accuracy of a few nanometers. The work presented in this paper provides a good way to achieve robust and high precision measurement with compact system configuration.