I am only assuming here Brento, but I think encoder signal type has to do with the scale and read heads you have installed. For example, on my Acu-rite, I had to select the resolution ie .0002", .0004", .0005". This is not an option, the selection is driven by the scales you have installed.
The easiest way to confirm that you have selected the proper resoution is to watch the display count and compare that to your dials. Move your dials .100", the display should read the same. If you pick the wrong resolution, the count will be off by a multiplier. For instance, if you choose .0004" as your encoder type and your actual encoder has a resolution of .0002" you will read .200" of travel on your display while your hand dial reads only .100".