First, we'll make a hand - we'll put the origin of its coordinate system at the base of the hand where it attaches to the wrist.

Now, we'll make the wrist bone. The center of the coordinate system is the elbow. The wrist joint is at the end of the bone - so that's where we'll place the hand (by translating it to the right place). We'll also rotate the handle by the wrist joint angle.

Now, we'll make the upper arm bone. The center of the coordinate system is the shoulder. The elbow joint is at the end of the upper arm bone. We'll place the wrist at the elbow (by translation) and rotate the elbow by the joint angle.

Now, we'll make the Torso. It's center is at the waist. The right shoulder is at the top right of the torso. That's where the arm gets attached.

Try changing the joint angles with the sliders below. Notice that when a bone moves, the other things in its coordinate system (the parts connected to it) move as well. Because we are only changing the rotations, the parts stay connected. Remember that each of the pictures is in a different coordinate system.