There goes the neighbourhood...

I am always a bit weary of Link Exchanging. There are two reasons for this. Firstly, your site can end up looking like a directory.

Having the directory effect can cause your site to get traffic simply from a listing you exchanged.

To illustrate why this is bad... lets say you have a site selling shoes, but because of a bad link exchange you end up getting traffic from people searching for fishing poles. Simply because one of the links you exchanged with a fishing pole site. This is why it is pertinent to analyse each site that you wish to exchange links with. Make sure that the site is somehow related to your site with regards to content. On the other hand you don’t want it to have a link exchange with your direct competition.

The second reason why any search engine optimiser (SEO) should be weary of link exchange programs is the most important. You can end up in a bad neighbourhood.

This simply means that you have exchanged links with a site that has a bad rating with the Search Engines. A bad rating here, does not mean low Page Rank. In this case it means that the site has been black-listed for being a bit spammy, a link farm, or for trying to trick the search engines in some way.

A good idea is to use a tool like Bad Neighbourhood Tools to search for questionable links. But this is not full-proof. It will only give you an indication.

For more information on this topic see this brilliant seo article