A novel self-mixing interferometry (SMI) with dual external cavities was proposed. The model of interference, as well as the modulation and demodulation of interference signal are analyzed. The developed technique uses an additional reference reflector to form dual external cavities between the LD and the target, and reference external cavity is used to compensate the phase error due to optical frequency fluctuation. FFT phase detection technique was applied to analyze SMI signal. By using these techniques, the high precision measurement can be obtained. It is a promising technique used in microelectromechanical systems (MEMS), optical engineering and other engineering application.