To implement the optimal noncoherent sequence detection of quadrature modulated signals in flat fading channels, a new algorithm that performs generalizedlikelihoodratiotest optimal incoherent sequence detection is proposed in this paper. Moreover, for Rayleigh fading channels, the proposed algorithm is equivalent to the maximumlikelihood noncoherent sequence detector. Firstly, the decision on the information symbol xn at the nth time slot is obtained by the algorithm, and a decision sequence is formed according to the change of the decision in a given phase interval. And then the phases where the decision sequence changes are sorted in order to identify the target sequences on the corresponding intervals. The theoretical analysis results show that the proposed BFSK optimal sequence detection can be applied to the detection of the optimal incoherent sequence of FM0 signals used in modern radio frequency identification systems. And the simulation results show that the proposed optimal sequence detection algorithm has nearly equal BER/SER performance to the traditional ML coherent sequence detection algorithm. Compared with the traditional exhaustive search algorithm, the proposed algorithm greatly reduces the computational complexity.