5. Years ago link exchange was really popular. Everybody knew he needs a lot of links to succeed, so he traded with others:
A gives link to B
B gives link to A
Links A ---> B and B ---> A are called reciprocal links.
Of course A and B could trade with C, D and so on and soon there was also automation available. Link exchanging is still alive, but is loosing popularity. You can be actually penalized if you participate in link exchange schemes. Most of it is made through java which is invisible to search engines so sites involved don't risk so much. But they are still in risk.
I think some link exchanging can be good for your on-line presence if it is done right but only if the reciprocal links are a part of link building strategy. In normal world it is cool to have connections with different people and web is trying to imitate real world.
And one more simple trick:
If you have more than one site (let's say A and B), you can improve link exchanging with somebody who also has more than one site (let's say C and D):
A gives link to C
D gives link to B
This way we don't have classic reciprocal links but two one way links which are in general more powerful than reciprocal links.
Just don't exaggerate...