If it says the following: dumbbells are raised by shoulder abduction, not external rotation - what does it mean exactly? My understanding is that the movement is initiated by moving the upper arms up only, not by trying to raise a dumbbell with the whole arm. Is that correct?
Correct. Pull with the elbow, not with the hand.
I think the important thing they are trying to get you to do here is not rotate your arms so that your thumb points up while your doing a lateral raise.
If you externaly rotate you will recruit the front delt a lot more and not hit the middle delt as much. I find if I lean forward slightly and think about keeping my pinky up then It works the middle delt the best.