What to do with the BLUE wire ?
Blue goes to GND as well as the shielding. Brown goes to 5V, correct.
I don't understand Interrupt service and how to connect OUTA and OUTB if I want to know encoder turning direction (CW or CCW)..
OUTA and OUTB has to go to digital IO pin on the Arduino. Do you need an interrupt? How fast will the encoder be rotated? Please tell more about your specs to help you find the best solution for your case. What other devices are connected to your Arduino? How many such decoders do you wanna connect to the Arduino, what's their purpose?