For optical feedback interferometry, a modulation and demodulation method based on phase-freezing technology was brought forward to increase the measurement resolution. And a displacement measurement system with phase modulator was designed. The phase of the outer cavity was modulated by the modulator, and interference signals that have fixed modulation phases were collected. Then displacement information of the target can be observed by demodulation and reconstruction. Signal modulation, sampling, reconstruction technology and error analysis were studied, and the feasibility of this method was verified by simulation. The results demonstrate that the accuracy can be up to λ/20 using five-point phase-freezing sampling. This method can enhance the accuracy of optical feedback interferometry, and process signals in real time. So it can be used in real time displacement measurement.