A novel displacement measurement with optical feedback of dual frequency laser has been put forward, which has been investigated both theoretically and experimentally. Intensities of the laser and the two orthogonally polarized modes are detected. It is found that the laser output power will be modulated when the object moves. When the displacement of the object is half wavelength, the signal of optical feedback has two peaks with the same depth of modulation. So the resolution of displacement sensor can be doubled. It is also found that when the object changes its moving direction, the order of intensity variation of the two modes will be changed. It can be used to judge the direction of the displacement. The simulation results are in good agreement with the experimental results. It is indicated that the sensor has advantages of simplicity, high resolution, direction identification cepability, large measurement range, operation in high optical feedback regime, and so on.