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An optical fiber sensing method based on a reflective grating panel is demonstrated for lateral displacement measurement. The reflective panel is a homemade grating with a periodic variation of its refractive index, which is used to modulate the reflected light intensity. The system structure and operation principle are illustrated in detail. The intensity calculation and simulation of the optical path are carried out to theoretically analyze the measurement performance. A distinctive fiber optic grating ruler with a special fiber optic measuring probe and reflective grating panel is set up. Experiments with different grating pitches are conducted, and long-distance measurements are executed to accomplish the functions of counting optical signals, subdivision, and discerning direction. Experimental results show that the proposed measurement method can be used to detect lateral displacement, especially for applications in working environments with high temperatures.