In order to achieve an optimal trade-off between the robustness against unknown inputs and the fault detectability, an observer-based residue generation and fault detection method applying sliding mode observer is presented in this paper. Taking advantage of the essential feature of sliding mode variable structure technology, being completely insensitive to unknown input disturbances, the generated residue of the designed fault detection system is not affected by the unknown input, but still keeps high sensitivity to the fault signal. Simulation results show the effectiveness of the proposed approach.