The performance of an optical linear encoder is described and evaluated by certain parameters such as its resolution, accuracy and repeatability. The best encoder for a particular application, just like other sensors, is usually selected according these parameters. There are, however, many side effects that have a direct influence on the optimal operation of an encoder. In order to understand how to minimize these harmful effects, a deeper knowledge of an encoder’s performance and a method for determining these factors are necessary. The main aspects of an encoder’s accuracy, resolution and repeatability are briefly reviewed in this paper. Discussed and developed in previous work, the experimental reading head for a Moiré effect-based optical linear encoder is used for the experimental analysis of the influence of different reading head designs on an encoder’s performance under various mounting inaccuracies and dynamic conditions.