Stable operation is a crucial challenge for opposed-piston free-piston engine generator (FPEG). Due to the absence of mechanical constraints, variations position-based operation parameters would have a significantly impact on the operation performance of the system. This paper conducted a comprehensive investigation into the effects of position fluctuations on the system's dynamic characteristics and thermodynamic performance by leveraging a detail system model with stable operation. Additionally, a novel real-time position observation approach for the mover was proposed, leveraging observation coils. The findings indicate that the opposed-piston FPEG system can quickly recover to stable operational state within a few cycles for a one-time position error, if there is no misfire in the power cylinder. The acceptable range for stable operation of the opposed-piston FPEG is between +35 % and −48 % for the one-time position error. With the continuous position error varying from +20 % to −30 %, there is a noticeable decrease in the compression ratio, operating frequency, and overall system performance. A significant linear relationship has been found between the flux linkage value of the observation coil and the position of the mover. The maximum difference between the observed position calculated by the proposed approach and the actual position was below 4 %.