I only saw the diagram after searching for 'rotary encoder' and clicking some links, I do tend to jump the gun basically all the time so I saw the diagram and ordered the IC's without actually researching why I was buying them! I noticed (literally about half an hour ago) that the pins and the assignments don't match up; Pin 5 is labeled as D, but 1D is pin 2 and so on. I've tried wiring it up according to the assignments rather than numbers now, I've got it working a bit better, but still not working properly. Now if I run the serial monitor the 'step' is always high but the direction does change, but two of the four positions are "0" and the other two are "1", as if I'd just connected the encoder's A or B pin directly to the Arduino's 'direction' pin.
As I understand it, this circuit will basically output alternating high and low on the step pin, and then with the direction pin it'll be high if I rotate it one way and low the other way, is that right? Could I skip the 74LS74 and do the decoding in software? Problem is that would be far more cumbersome that way, and I would like to learn as much as possible so I'd like to do it with the 74.
I'm just off to read those links you sent, thank you very much for the help, once again! I didn't even know decoupling was a thing.