Chagrin:
A potentiometer would probably be easiest if you can find one that's durable enough and allows continuous rotation.A couple links for fairly inexpensive encoders:
http://www.usdigital.com/products/encoders/absolute/rotary
http://www.cui.com/Product/Components/Encoders/Absolute_Encoders/Modular/AMT203-VThere are also ICs (e.g. AS5030) that will sense the rotational position of a magnet placed over them. Offhand I can't seem to find any retail breakouts for them. The least expensive option but also the most difficult to implement.
Do I need an encoder as I am using potentiometer ?