A study of a wind direction optimization compensation algorithm is carried out to improve power generation by enhancing the wind energy conversion rate of wind power equipment without increasing the hardware cost. First, the laminar flow component and turbulence component of yaw error are defined while studying the influence of wake flow on wind direction measurement error. A tangential induction factor compensation algorithm is established to compensate for the laminar flow component error, and the Kalman filter algorithm is introduced to compensate for the turbulence component error at the same time. After that, a method and an index value are established to verify the accuracy of the algorithm. Finally, the algorithm is tested and verified based on the experimental conditions of the project team. The test results show that the wind direction compensation algorithm could improve the accuracy of the turbine against the wind by 30.36% and the generating capacity of the optimal power generation condition by 2.82% without increasing hardware. This work is supported by National Key Research and Development Program of China (No. 2018YFB0904000).