Does your encoder have a small printed circuit board like this? These are the common KY-040 encoder. You may also have the encoder without the pcb. If you have this type, run a line from 5 Vdc on the DDS VFO board (pick it off J1) to the pin marked plus (+) on the pcb. This line is not shown on the DDS VFO schematic.?

These types of encoders seem to conflict with the internal pull down circuit in the Nano and prevent incrementing or decrementing frequency unless you supply them with a 5 Vdc source. I have not tried using a bare bones encoder (one without the pcbs) but I have a few in my junk box and might try one later tonight.

73

Gary W5GW