A rotary encoder is a positional sensor for determining the angular position of a rotating shaft. You can use Arduino boards with modules to achieve such function. There are total 5 pins on the encoders, 3 of them on one side are for rotary encoding which need a simple circuit to supply DC 5V, the remaining 2 pins go short when they are pressed. Please refer to the example scheme for more clear understanding.

In the middle of 3 pins' side is COM port connect to GND .

And other pins (A and B same side of GND) separate pull to +5v via 10k ohm resisters .

Connect the A and B directly to Arduino IO pins.

Arduino usage: http://www.arduino.cc/playground/Main/RotaryEncoders