Grumpy_Mike:
How does one detect sensor errors without having multiple sensors?
Generally you are write, however:-
In this case the two bits have a pattern. For any one pattern there are two valid patterns that happen next, one for clockwise and the other for anti clockwise. This leaves one transition that is not valid. If you see that, it is an error.
Yes, only one bit of the 2 bits can change at anyone time, ie you cannot have both bits change at the same time.