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For most search engines, part of your ranking with them is based upon how popular you are. It's like with credit, where you can't get credit until you have credit. Search engines will not rate you high until you show you are highly rated first. Your popularity is determined by how many sites are linked to you. The more sites that link to your site, the higher your popularity rating. The logic is based upon providing searchers with what they want. If a lot of sites are linked to you, you must be of value and therefore search engines will rank you higher.
If...and only if your site is so full of advertising money that you already know you can just buy your way to the top, you don't have to swap links or trade links, but for the other 98% of us, you absolutely have to if you want your search engine ranking to be decent.
There are several things to consider when deciding that you will swap links with other sites:
When you first start out, virtually nobody will request a link exchange with you, because they won't know that you exist. It's up to you to take the first steps in getting your Links Area established. In time, after you have linked to at least 150 sites on your own, you will find people gradually making requests of their own.
The biggest question is generally "How do I know what sites to link to? Not all sites swap links. How do I find the sites that do?" You should already be aware of who a few of your competitors are, or other sites that provide similar products and services as you do. Go to Alta Vista and in the search request box type in: link:www.theirdomainname.com . Having done this, you will get a listing of every site that is linked to them.
The information provided by the link search also confirms that these are sites that engage in swapping links, otherwise they would not appear here. Since they are of a similar interest to your site, you are all set to click on these links, one by one and request a link exchange.
There are many variations in what a site may request of you to exchange links, but you are pretty much guaranteed a trade if you already have their link in place on your site when you request the swap. Make them aware that you will keep their link in place for at least 10 days so that they have ample opportunity to respond to you and place your link on their site as well.
To determine your current Link Popularity, see our recommended Link Popularity Check site. You'll get a real good idea where you stand with respect to many of the search engines and with the Web overall.