Application notes from TT Electronics on optical encoders versatile sensing. Link here (PDF)
Linear and rotary encoders have come in a wide variety of design styles over the years, the most common being rotary switches, potentiometers, capacitive, magnetic, and optical types. The optical encoder has become the most popular of these encoding methods due to its long life, simplicity of construction, versatility, high accuracy and high resolution. This application bulletin will briefly define an optical encoder, and bring the designer up to date on encoder terminology, design techniques and limitations.