The rotory incoder you have should several glass disc mounted on a shaft that rotates. The first disk will be divided into 2 parts, 1/2 black and 1/2 clear.
The second disc will be divided into 4 parts, 1/4 black, 1/4 clear, 1/4 black, 1/4 clear.
The third disc will be divided into 8 parts, 1/8 black, 1/8 clear, 1/8 black, 1/8 clear, 1/8 black, 1/8 clear, 1/8 black, 1/8 clear.
The 4th disc will be divided into 16 parts, 1/16 black, 1/16 clear, 1/16 black, 1/16 clear, 1/16 black, 1/16 clear, 1/16 black, 1/16 clear, 16 parts, 1/16 black, 1/16 clear, 1/16 black, 1/16 clear, 1/16 black, 1/16 clear, 1/16 black, 1/16 clear.
The 5th disc will be divided into 32 parts.
The 6th disc will be divided into 64 parts.
The 7th disc will be divided into 128 parts.
An so on. It depends on the encoder as to how many disks it will have and how accurate it is designed to be but most are accurate to .0005" of an inch. All an encoder does is provide information to the computer that can be used to tell the system the exact location of a moving object.