Link exchanging is exactly as it sounds; it's an arrangement between two or more sites where each put a link to each other's website. Link exchanging is an old method now really as it holds very little value in terms of search engines due to the spamming of this method by low grade SEO companies. It does still have value though the exchange is done with a quality website which is relevant and has a good level of traffic then it should be able to provide some direct traffic.