Found below a good artical on creating external list to read data from SQL server using SQL Authentication:
http://blogs.msdn.com/b/mvpawardprogram/archive/2012/04/12/sharepoint-2010-external-content-type-to-read-data-from-sql-server-using-sql-authentication-and-secure-store-service.aspx
http://blogs.msdn.com/b/mvpawardprogram/archive/2012/04/12/sharepoint-2010-external-content-type-to-read-data-from-sql-server-using-sql-authentication-and-secure-store-service.aspx