Some of the advice floating around regarding linking for your site can be pretty confusing, especially when it comes to reciprocal linking. Is it something you have to do? Can your site succeed without reciprocal links? Will you be penalized for reciprocal linking?
There's a little debate over this so maybe this article will help bring shed some light.
Link Popularity
It is believed that Google works off a premise that when a lot of sites link to one site, it's likely that site is an authority for the topic. The "topic" is whatever those links say it is. If 25 sites link to another site with the term "turtle food," it's likely that page is an important page for turtle food.
Link Manipulation
It didn't take long for people who wanted to rank well for certain terms to figure out that they needed a lot of links with their chosen keyword phrases to improve their rankings in the search engines. Many schemes were born, including link farms. Bruce Clay has done this with one of our customers.
Reciprocal Linking
At the most basic level, reciprocal links are links you trade with other sites (you add their link, they add yours) in order to build link popularity. There are online services, group exchanges and software available to help you link up with more like-minded webmasters, fast. As a result, many sites have grown sizeable directories on topics that have nothing to do with their area of expertise, simply because those other sites were willing to trade links with them.
Does this work? At the moment, it does seem to work. The engines (except for Teoma, which analyzes link communities) tend to count a link as a link, regardless of the subject matter of the originating site.
Will it continue to work? Who knows? As the engines look for more ways to determine which sites are truly expert and which ones are simply manipulating their way to the top, link relevance is sure to come into play. Some say it's already starting to affect rankings.
Mutual Linking
I like to separate mutual linking from reciprocal linking. Mutual linking is where the content of each site actually benefits each other's sites. If you sell shoes, you may want to recommend other sites for replacement shoelaces and still other sites for shoe cleaning supplies. You may even maintain a directory of regional shoe repair service shops. This is useful information for your visitors, who are likely to need these services as well. It makes sense for these sites to also recommend your shoes and link to your site. While it's technically still a reciprocal link, it has a mutual benefit for both sites.
While you can make a case that visitors to your shoe site might actually need weïght loss formulas, like to gamble, or are concerned about the size of certain body parts, it really isn't likely that links to these sites will be clicked and followed by your visitors. They only make your site look unprofessional. The links you trade with these sites may or may not actually be helping you in the engines, but they're definitely not helping you to make more salës.
Will I Be Penalized for Reciprocal Linking?
You might. I don't say that to send you into a panic, but the truth is if you link to a site that is considered a "bad neighborhood" by the engines, it could negatively affect your site. That innocent-looking pet accessories site may be cloaking, hiding links or text, or participating in other linking schemes and just hasn't been caught yet. Why risk it for a link that probably won't even bring you traffic? Sure, people who wear shoes often have dogs, but if you're just linking to them for the link, it's probably not a good idea.
Be very aware of whom you link to. You control where your site links to and that could come back to haunt you. Advice: Link only to the sites that will help improve your credibility and your sales!

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