A link exchange is an attempt to gain more inbound links by offering to link to another site (usually in some related niche) in exchange for a link back from that site. Some link exchanges are natural and work for the end user – two webmasters realising their content complements each others sites well might link to each other to help their users. In many cases though it is simply a transparent way to obtain inbound links and improve search rankings. It has been speculated that as a result of this the value of straight swaps like this is limited.
In an attempt to improve the results many webmasters swap links from ‘related sites’ in a 3 way link exchange. This means the sites do not link directly back to each other but another site in the webmasters’ portfolio. This avoids a transparent swap and the hope would be that search engines would view this as a more legitimate new inbound link. The problem is that many times sites will be hosted together on the same server which limits the value of this kind of swap for many webmasters.