A method of transmitting a plurality n data streams comprises modulating an optical carrier using differential M-ary phase shift key (DMPSK) signalling in which M=2n. Advantageously the method comprises using differential quaternary phase shift keying in which n=2. A particular advantage of the method of the present invention is that since the data is differentially encoded in the form of phase changes rather than absolute phase values this enables the modulated optical carrier to be demodulated using direct detection without requiring a phase-locked local optical oscillator. The invention is particularly applicable to WDM communication systems.