The output characteristics of wavelength encoded optic displacement sensors and disadvantages of the demodulation method based on spectrometers are presented. The principle of colour sensors and the demodulation feasibility of colour sensors on the output narrow band light are discussed. A PCB for demodulation is designed and a displacement sensor with the scale of ±60mm is tested, the accuracy of which is ±0.37%F.S, and a high dynamic demodulation of 600Hz is achieved.