Seems to me it all depends upon the actual max. speed you want to measure. I have designed an encoder circuit (we use it for liquid level gauging) with a 2-bit Gray code encoder, connected directly to a 8052, with a measuring range up to 100.000 counts (mm in this case). In order to be able to detect 'missing counts' I use a second clock signal (requires an additional signal from your encoder). We can measure safely up to approx. 1.000 counts per second and detect missing counts up to roughly 2.000 counts per second. For higher speed applications, you can use an absolute encoder with for instance a serial output. There are numerous manufacturers, prices are getting better and better and they can keep up to speeds of several thousands of pulses per second.