An encoder with one set of pulses would not be useful since it could not indicate the direction of rotation. Most incremental encoders have a second set of pulses that is offset (out of phase) from the first set of pulses, and a single pulse that indicates each time the encoder wheel has made one complete revolution. Since the two sets of pulses are out of phase from each other, it is possible to determine which direction the shaft is rotating by the amount of phase shift between the first set and second set of pulses. The first set of pulses are called the A pulses, and the second set of pulses are called the B pulses. A third light source is used to detect a single pulse that appears once per revolution.
It would be impossible to drill hundreds of holes in the encoder wheel to get the higher amounts of resolution because the wheel would not have enough material remaining to give the wheel strength. For this reason modern encoder wheels with high resolution use etched glass wheels. The glass is etched with chemicals to produce alternating opaque segments.
If the shaft of the encoder is connected to a drive shaft for a motor that is connected to a ball screw or a reduction gear, the number of degrees of resolution can be converted into linear position.


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