The CAGED system, when applied to chording is about using 5 fundamental chord shapes to play chords all over the neck. You can play any chord using the C form x, 3, 2, 0, 1, 0; A form x, 0, 2, 2, 2, 0; G form 3, 2, 0, 0, 0, 3; E form 0, 2, 2, 1, 0, 0; or the D form x, x, 0, 2, 3, 2 (and the respective minor forms of A, E, and D).
What's important about the CAGED system is where your hand is at the chord change and which root would be best for you to play. Say you start on an Am, E form (5, 7, 7, 5, 5, 5). Next chord is a Dm. How should you play it? Go to the open position D form? No, that's too far of a jump. The closest voicing would be 5th fret A string. Which in the CAGED system has a fifth string root, preferably with the index finger on around the 5th fret? The Am form, so you'd play Dm using the Am form (x, 5, 7, 7, 6, 5). Makse sense? It's all about a method of thinking about bar chords.
"You must stab him in the heart with the Bone Saber of Zumacalis... well, you could stab him in the head or the lungs, too... and the saber, it probably doesn't have to be bone, just anything sharp lying around the house... you could poke him with a pillow and kill him."
- Aqua Teen Hunger Force, The Universal Re-Monster