Controlling Arduino through MATLAB?
Do all the processing on the Arduino, and supply the results to Matlab over serial.

I'm not 100% sure about your particular encoder, but generally encoders talk in "Grey Code".  This is a series of bits which allow you to know the direction the encoder has turned.

There are a number of libraries and tutorials for Arduino dealing with encoders.


http://playground.arduino.cc/Main/RotaryEncoders
http://www.hobbytronics.co.uk/arduino-tutorial6-rotary-encoder


The one I use comes from here:


http://www.pjrc.com/teensy/td_libs_Encoder.html


It would be best to use a library with interrupt routines on pins 2 &amp; 3 (these support external hardware interrupts), so whenever the pin gets a signal from the encoder, the Arduino can act on it immediately.  If you do not use these pins, and have time-consuming processing in the loop(), it's easy to miss 'ticks' from the encoder.

#include &lt;Serial.h&gt;

// Rotary Encoder (Interrupt Driven)
#define ENCODER_PIN_A       2 /* must be pin2 for interrupt */
#define ENCODER_PIN_B       3 /* must be pin3 for interrupt */
#define ENCODER_OPTIMIZE_INTERRUPTS
#include &lt;Encoder.h&gt;
Encoder encoder(ENCODER_PIN_A,ENCODER_PIN_B);

void setup()
{
    Serial.begin(115200);
    // Gentlemen, start your encoders
    pinMode(ENCODER_PIN_A,INPUT_PULLUP);
    pinMode(ENCODER_PIN_B,INPUT_PULLUP);
}

void loop()
{
    unsigned long start_time = millis();
    Serial.println("Dear Matlab...");

    while (1)
    {
        unsigned long now = millis();
        unsigned int encoder_value = encoder.read();

        // Do whatever angular velocity processing is needed here
        unsigned long ticks_per_ms = encoder_value / (now - start_time);

        // Send the result back to Matlab
        Serial.println(ticks_per_ms,DEC);
    }
}


I think for your encoder the "A" and "B" outputs are where the grey code will be coming from.  These would be connected to Arduino pins 2 &amp; 3.

Obviously the code above is not a complete solution, and needs to take care of edge-conditions like overflow of millis() after some time, etc. etc.