CAGED is a system of movable chord shapes that helps you play chords anywhere on the guitar fretboard. The basis of the CAGED system are the already known open chords C, A, G, E and D, hence the name CAGED.
Let's start with a question: What would the E major chord look like if we played it an octave higher?
The result is still an E major chord, but it's no longer an open chord, since all strings are fretted. The advantage of chord shapes where all strings are fretted is that these chord shapes are movable without changing the relationship of the notes to each other.
If we now move the chord shape from the 12th fret to the 5th fret, we get an A major chord instead of an E major chord.
It's important to distinguish between chords and chord shapes. The new chord on the 5th fret is an A major chord, but it's played using the E major chord shape.
The idea of making open chords movable can be applied to any open chord. For example, also to C, A, G and D:
Some of these movable chord shapes are difficult or even impossible to play, so sometimes it's enough to use parts of these shapes, but more on this later.
Now that we have turned the five open chords C, A, G, E and D into movable chord shapes, let's have a look at the CAGED system. The CAGED system combines the five movable chord shapes described above into a pattern that spans the entire fretboard:
What you see above are five different ways to play the same chord. If you want to play a different chord, you need to move the CAGED pattern accordingly (the 1 in the pattern needs to match the root note of the desired chord).
One way to think about the CAGED system is to always have the entire CAGED pattern in mind and move the entire pattern. Another way of thinking is to use the individual chord shapes and move them accordingly. For example, if you want to play a D major chord using the C major chord shape, all you need to do is move the chord shape so that the root note matches your desired root note.
You could also use the G major chord shape to play the D major chord.