Photoelectric encoder is a kind of numerical high-precision angle-measuring device, which is grandly applied in modern automation system. In order to do in-depth research and improve detection efficiency in photoelectric encoder fault diagnosis, the classification and operating principle of photoelectric encoder are introduced firstly in this paper. Moreover, current developing situation for encoder fault diagnosis method at home and abroad is presented and typical encoder fault diagnosis methods are compared. The advantages and disadvantages of each fault diagnosis technology are summaried. Finally, the trend of automation, portability, dynamic detection, multi-technology fusion and fault prediction in photoelectric encoder is proposed.