Atomistic simulation is an ideal tool to study the microstructure of polycrystalline materials at the nano- scale. As shown in this work, to be effective, suitable algorithms should be used for creating realistic microstructures. Further, we show how the contributions of atomic displacements (static and dynamic) and of microstrain (distortion at the grain boundaries) can be separated in a computer generated microstructure by combining the analysis of the local atomic arrangement with the corresponding simulated X-ray Diffraction (XRD) patterns. New insights can be obtained on the microstructure of nano-polycrystalline materials, and on the interpretation of the line broadening observed in the XRD patterns of real specimens