Stepper motors work by alternating a series of magnets in order to rotate its shaft by a certain angle. When the shaft is manually twisted, these magnets produce an electrical signal in a predictable pattern, which as shown in the video below, can be used as an encoder with the help of an Arduino Uno.
More information, including a circuit diagram and the Arduino code used for the stepper-NeoPixel and stepper-stepper examples can be found here. While the write-up notes that this stepper-encoder won’t work reliably if turned too slowly, it seems to work quite well at the fairly low speed shown in the demonstrations.
I want to tell you how to make incremental encoder from stepper motor. When we turning shaft of stepper motor it works like generator. It generates certain impulses on its coils. After some signal processing, we get same impulses as incremental encoder. This encoder has one problem, it can drop steps if you turning very slowly. But for many applications, it doesn’t matter.