Arduino weather vane
Its a long time since I looked at this and the details are a bit misty, so sorry for the inaccuracies, but I'm sure people will correct them for me :)

I originally brought one of these http://www.maplin.co.uk/p/maplin-replacement-wind-direction-sensor-for-n96fyn96gy-n81nf and then decided to take it to bits, like you do.

The vane spins a magnet around and this triggers 1 of 8 reed switches as it passes around.  The read switch is connected to VCC and a resistor and the resistors feed into a common wire back to the microprocessor.  The 8 resistors all have different values, so the result is a differing output voltage depending on which reed switch has been triggered.

So what you need is:


A magnet 
A number of read switches positioned far enough apart so only one is triggered at a time
A number of different resistors


Supply 5V from you Nano and read the result on an analogue pin, then come up with a calibration table to work out the direction.

I hope that makes sense.
(Sorry I can't draw you a circuit diagram)