He means that you place sprites behind your image for the joystick that you can have "player touch sprite X" events for, which you then use to control your player.
- Player is touching "joyUp"
+ Simulate control "up"
Something like that. If you need more granularity, and actually want it to be analog (how weird isn't the concept of a digital analog joystick, btw) you'll have to do something else, like determining if the player is touching within the area and using lerp to get the values.