Aiming at the problem of low spatial resolution in conventional optical frequency domain reflectometry(OFDR) systems utilizing external modulation laser source, a method of an OFDR system based on IQ modulation tunable laser source(TLS) is proposed. The principles of the basic OFDR system and the IQ modulated frequency sweeping laser source are analysed. The frequency stabled incident laser is modulated utilizing IQ modulator to generate frequency sweeping light signal. The simulation model of OFDR system based on IQ modulation is established. The temperature or strain changes are generated on the fiber under test(FUT) by altering the phase on the local backscattering light. A differential FFT demodulation method is proposed to detect the position of parameter variation with a high speed. The simulation results demostrate that the system is able to sense and locate the simulated parameter changes on FUT with high accuracy, and a 0.23 m spatial resolution with 100 m sensing range is achieved. The research demostrates that the system optimizes the spatial resolution, reduces the complexity of the demodulation algorithm and improves the parameter sensing accuracy, which provides theoretical basis and measurement methods for OFDR applications in short range strain and temperature sensing with high spatial resolution.