you only want to exchange links with sites that are 'in your same neighborhood'... meaning that you should only link to and from sites that are relevant to yours. they should be related in some way and have complimenting content.
you want as many links coming INTO your site as possible (again, staying within your neighborhood), but it is a good idea to link out as well.
here's a few links that can get you started with SEO:
and a nice list of tools