It depends on the situation and what the expectation of the teacher is. If the teacher specifically asked you to record error, then s/he likely provided methodology somewhere along the line.
If you are making note of the error because you think it is the right thing to do, I would recommend using the residual error and making note of how you calculated it in your lab report. There are at least two reasons I would take this route:
If your residual error is an order of magnitude larger than the readability of the device, chances are very good that the experiment is complex enough that there are many sources of error you are overlooking. Given the accuracy of most lab equipment (even in a high school setting), there are aspects of your experiment that add to your uncertainty more than the equipment readability.
The residual error is likely based on a well recognized phenomenon with an accepted mathematical model. If the standard model says that you should get a certain value, that's what you should get. The chances that you have discovered some strange exception to the recognized physics are remote.
If you are interested in high end metrology and would like to learn more, the internationally recognized best practice for calculating and citing uncertainties can be found here.
Good luck with your class!