This study was designed to investigate the importance of spatial encoding in reading, with particular emphasis on visuo‐spatial encoding mechanisms. Thirty one school children participated in the first study in which they were measured on their ability to solve a centrally presented spatial encoding task, as well as their sensitivity to the frequency doubling illusion across the retina. We found that both spatial frequency doubling sensitivity and performance in the spatial encoding task were correlated with reading, however these tasks were unrelated to each other. Furthermore, frequency doubling sensitivity was correlated with contextual reading, but not single‐word reading, while the central spatial encoding task was correlated with both reading tasks. These findings may have functional implications for text presentation preference. Accordingly, in Experiment 2 we demonstrated that children with poor FDT sensitivity read more accurately when words were presented singularly rather than in a whole‐text format. In conclusion, we suggest that contextual reading may depend upon two separate and functionally distinct visual encoding mechanisms—one central, important for the spatial discrimination of letters within words, and the other, a spotlighting mechanism important for spatial localization within a body of text. While both mechanisms may constrain reading efficiency, neither mechanism enforces an absolute limit on reading ability.