An improved signal demodulated method of phase-sensitive optical time domain reflectometer (OTDR) system was proposed. The principle of the method was illustrated theoretically. The effect of the values of key parameters (average time, moving window, substracting interval) on the result of signal processing of the phase-sensitive OTDR system was analyzed and selection of these key parameters was summarized. Compared with the conventional digital average method, the disturbance signal was effectively demodulated with the method, which illustrated the feasibility of the method further. The result shows that the method increases the correlation of each group data with dividing original data into groups as the fluctuation characteristics of signals, thus improving the SNR of system obviously. This method can extend the performance of long distance phase-sensitive OTDR to some extent.