First lets talk about the myths of links.
Myth 1. - If you have links from BAD NEIGHBORHOODS Google will penalize you.
Not true. If that were the case all I would have to do is purchase some links from adult sites to my competitors sites and I would soon be the only website listed under my main key phrase.
It is a great scare tactic but it lacks any bite. To penalize someone for something they really have no control over would not only make it very easy for seo people to get rid of competition but also really corrupt the search engines database to the point where it was no longer useful.
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Myth 2. - 3 way links are good. No they aren’t. Eventually no matter how good the linking scheme is for a 3-way link trade you will get caught and penalized. Google knows ALL the links from ALL the sites. It is just a matter of them searching their own database every so often for these 3 way links.
If you are going to do this, take it to at least 6 levels deep so that it makes a search that size totally unfeasible…. but still possible… for a search engine.
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Myth 3. If you link out you will lose some standings in the search engines.
I do not believe this. My research and testing indicates that your site linking out to what would be considered an EXPERT site in your field actually helps you. This could be a manufacturer you are a dealer for or something like that. If they are a higher PR site then you and are considered an expert in their field. Then it will HELP you to link to them. Sometimes to start off a linking page for my customers I will go to Google, Yahoo and MSN Live Search and take the top 5 results from each. Then get rid of any duplicates and post those links out from my site. If the search engines think they are top 5 under that key phrase then it sure isn’t going to hurt me to link out to them too.
I will agree that if you post a ton of links on your pages to just anyone it will suck off a good bit of your pr and that may or may not hurt you in the results standings. It is best kept away from.
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Link Trades and Dirty Tricks to Watch Out For
Everyone has used a link trade site. You register, put up the owners code and then he ALLOWS you to be in contact other members to do link trades. Some of these are highly automated and others are pretty simple. The trick used here is a Bad Mean Webmaster will trade links with anyone. But then he puts a no follow or a no index, no follow tag in his robots.txt and-or his robots Meta tag for his link pages. This means he gets the credit for your link but the search engine spider never picks up that you aren’t getting credit back for his link to you. It is fairly common practices so make sure you look at the robots.txt and the robots Meta tag on any web site you are trading links with.