The wheelset coaxial wheel diameter difference is one of the most common wheel faults of railway vehicles. The existence of the wheelset coaxial wheel diameter difference may lead to the off-load operation of vehicles, resulting in abnormal wheel tread wear, leading to the deterioration of the wheel–rail contact relationship, resulting in the deterioration of the vehicle’s operating stability and comfort, and even leading to an increase in the derailment coefficient, affecting the running safety. In order to monitor the freight car wheelset coaxial wheel diameter difference online, a vehicle–track coupling dynamics model based on a trackside detection method was established, and the response of rail lateral displacement under the condition of the wheelset coaxial wheel diameter difference was analyzed. The results show that the existence of the wheelset coaxial wheel diameter difference can lead to a deviation in the vehicle’s run, with an increase in the wheelset coaxial wheel diameter difference and an increase in the lateral offset of wheelset increases. The impact of vehicle unbalance loading on the lateral movement of the wheelset is much smaller than that of the wheelset coaxial wheel diameter difference. The existence of the wheelset coaxial wheel diameter difference can be better reflected by detecting the wheelset’s lateral displacement. On straight line, the variation of lateral displacement has no infection of vehicle speed, but shows a quadratic growth trend with the wheelset coaxial wheel diameter difference. Based on this, the mapping relationship between the wheelset coaxial wheel diameter difference and wheelset lateral displacement can be obtained. Through a mapping relationship, the size of the wheelset coaxial wheel diameter difference can be reversed precisely through the detection of a trackside lateral movement monitoring system. The reliability of the identification method was verified with a specific test on the trackside monitoring system.