In this study, a subnanometer heterodyne interference signal processing algorithm with a dynamic filter is proposed. The algorithm can effectively reduce the measurement error caused by the noise introduced in the optical path and circuit. Because of the low signal−to−noise ratio of the measurement signal, a dynamic filter with variable coefficients is designed. The role of the bi−quadrature lock−in amplifier algorithm in the problem of different amplitudes among the measurement signal, reference signal, and uncertainty of the frequency difference of the dual−frequency laser is analyzed. With the aid of the heterodyne interferometry platform, the error in the solution results of the proposed algorithm and the conventional algorithm is compared. The results indicate that the maximum deviation of the phase increment of the algorithm does not exceed 6 mrad, the single−cycle phase difference can be subdivided by 1024, and the system resolution reaches 0.15 nm.