I don't see why I couldn't use a led readout. They are used all the time on DRO's for machine tools. I figured a 7 segment 4 digt led would be all I would need. Can you elaborate?
The rotary or linear encoder outputs data, to something that can read it. The LED readout is not such a device. You can use a LED readout, just not in the way you described.
I've read a few post today about that being an issue. Upon looking into it further it seems that the issue was the encoder was spinning at 400rpm and receiving 40,000 counts per minute.
The Arduino is relatively fast. It has two external interrupts that the encoder can be connected to. The will fire every time there is a signal from the encoder.
Where there is a problem is when people want to do complex calculations, serial output, delays, writing to an LCD, etc. in the interrupt service routine.
If all you are doing is cnt++ or cnt--, depending on the direction, then the Arduino is perfectly capable of keeping up. If you want to print the count to the serial monitor at 300 baud, show the value on a LCD, and write to an SD card every time the encoder sends a pulse, well, then you best limit the speed to about 1 rpw (revolution per week).
The hydraulic solenoid is 3 positions on - off - on.
Then, why send it an analog signal? A digital signal has two states - on or off. Hey, look, those match the solenoid states.
Impressive work. Wish I lived closer. Might want to come visit next summer. I hit New Mexico in June, every other year, then head to Virginia. Houston, if that's where you are, is not that far out of the way.