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To solve the problem that the reflective intensity modulated fiber optic displacement sensor is easily influenced by luminous power and external vibrations, this paper firstly introduces the theory of the reflective intensity modulated fiber displacement sensor. Then a displacement sensor of two-circle reflective coaxial fiber is presented, and the compensating-characteristics of the sensor are investigated, respectively. Much more, the method that uses circuit to achieve the compensation is put forward and the circuit is designed. At last, the stability of the fiber sensor and circuit which provide a new method for the compensation has been validated. The result shows the displacement sensor of two-circle coaxial fiber can eliminate the effects caused by the vibration of the fiber so that it has good compensation property.