It is regarded as not good practice to exchange links just for the sake of getting more links by search engines like Google and Bing. There are several different methods of link exchanging.
Some link exchanges can be automated (usually via php scripts) or can be arranged by organisations or groups. It can be said though, that link exchanges still can add value to users and therefore provides a legitimate method to link building. The different types of link exchanging can be view as follows.
Different types of link exchanging
Of the many different types for link exchanging, here are the two most common:
Reciprocal linking: Typically referred to as two way links. This is when two sites link to each other, i.e site A has a link pointing to site B and vice versa.
Three way linking: If an individual or organisation owns more than one website, they can exchange a link to one of their sites but linking back from another site that they own.
Google does not like link exchanges
It is common knowledge between SEO experts that the search engines do not like this kind of activity when the links are completely unrelated. Furthermore, it is even easier to detect if automation software is used to do the link exchanging.
However, link exchanges can be relevant in some cases. Ideally all links should be from sites with related content as this is a marker of relevancy for the linking site. For user friendliness, the link should add some value, possibly giving the reader further information or insights to related topics.
If the link is not adding value for the reader then it is possible to receive a penalty from the search engines like Google or Bing, but this is likely to only happen when the link exchanging is carried out on a large scale. A further disadvantage would be if the link is deemed as being a paid link.
Therefore, link exchanging can be worthwhile if carried out in moderation and with relevancy in mind.