Hi vedet44,
I believe you are trying to determine the distance the subject can move his arm by measuring the angle that the arm moves (at the elbow).
The law of cosines will allow you to calculate this value if you know the length of the subject's forearm, upper arm (bicept) and the angle they form. (See Law of cosines - Wikipedia)
You can measure the arm parts with a ruler, and the angle with the Arduino. I'd suggest a potentiometer rather than a rotary encoder though.
Pat