CAGED and chained

What I'm about to reveal is a system that is very important to grasp for every guitarist!
I dare to say that today's lesson is something that should be learned at some point in any guitarist's career.

What is CAGED then? Well, it is a system based upon the basic open chords that you learned when you first started playing the guitar. An open chord is a chord with at least one open string and with an open string we mean that it is a string that is included in the chord that is plucked without fretting it. If you don't know all of them yet, then I encourage you to do this as soon as possible.
We will refer to these chords as chord shapes in this context. A chord shape is as the name implies the shape of a particular open chord. So a C-shape chord is just a C chord in the open position but it can be transposed anywhere, however it will still only be a C-shape chord. It is the fingering that is important here.

Now you may think: "but I can work with barre chords using only shape A and shape E chords". Well, this is true of course, but this will limit you to only two particular chord voicings, which is pretty limiting, although they will give you a lot of chords to play with.

The neat thing about the CAGED system is that you can line up the chords so they connect to each other. This way, you can play the same chord at different positions without having to do any barre at all!. However I still think you should practice barre chords. They are just as important as CAGED IMO.
The big difference here is that CAGED chords represents chord shapes that can be chained up with one another so that you can traverse along the neck and find different shapes for the same chord (but different voicing), whilst barre chords enable you to easily transpose a given shape along the neck (but only a single voicing).

The CAGED chords can be seen as connecting to each other in chains. For instance, instead of playing an open G-chord you can play it like an E-shape chord but transposing it to the 3:rd fret. These chords will share the same root position but the sound will be different. Then the second octave in the E-shape G-chord i.e. the 4:th string on the 5:th fret (which is also a G-note) can further be the root for a D-shape G-chord (since the root is now located on the D-string). The D-shape chord then lines up with the C-shape G-chord with the root on the 10:th fret which in turn leads the way to the A-shape G-chord on the same fret. Finally the A-shape chord leads you to the G-shape chord again and the circle is completed.
Here is an illustration (the darker spots are root notes):

 And here is one for you lefties ;)

This forms a chain or ring (depending on how you look at it) with chords that interconnect.
Interestingly, if you look at the chord names in the figures, they form the abbreviation CAGED. For you lefties it will be DEGAC.

Here is an excellent web page that is dedicated solely to the CAGED system and probably explains it better than me: http://www.cagedguitarsystem.net/

And yes, the illustrations do use a Gibson SG. ;)