I'm James Hague, a recovering programmer who has been designing video games since the 1980s. This is Why You Spent All that Time Learning to Program and The Pure Tech Side is the Dark Side are good places to start.
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Virtual Joysticks and Other Comfortably Poor Solutions
Considering that every video game system ever made shipped with a physical joystick or joypad, the smooth, featureless glass of mobile touchscreens was unnerving. How to design a control scheme when there is no controller?
One option was to completely dodge the issue, and that led to an interesting crop of games. Tip the entire device left and right and read the accelerometer. Base the design around single-finger touches or drawing lines or dragging objects. But the fallback solution for games that need more traditional four or eight way input is to display a faux controller for the player to manipulate.
The virtual joystick option is obvious and easy, but it needs pixels, filling the bottom of the screen with a bitmap representation of an input device. Sometimes it isn't too obtrusive. Other times it's impressively ugly. Aesthetics aside, there's a fundamental flaw: you can't feel the image. There's no feedback indicating that your hand is in the right place or if it slides out of the control area.
There may have been earlier attempts, but Jeff Minter's Minotaur Rescue, released just over a year ago, was the first good alternative to a virtual joystick that I ran across. Minter's insight was that directional movement anywhere on the screen contains useful information. Touch, then slide to the right: that's the same as moving a virtual controller to the right. Without lifting your finger, slide up: that's upward motion. There's no need to restrict input to a particular part of the screen; anywhere is fine.
He even extended this to work for twin-stick shooter controls. The first touch is for movement, the second for shooting, then track each independently. Again, it's not where you touch the screen, it's when and how.
It's all clean and obvious in retrospect, but it took getting past the insistence that putting pictures of joysticks and buttons on the screen was the only approach.