The AREF pin is clearly marked on the datasheet. On the Atmega328 in PDIP format it is pin 21.I'm not sure what they mean by external capacitor, as far as I have seen it isn't usually used.The analog read is likely to slightly differ from one time to the next. I suggest you average them.
Im not really sure what to expect with POT's.. should it bounce a little around after just moving? and I may use code to average out as you said, or can i smooth the volatages so it gives me a more definite value?