Link Relevance will be key

Regarding reciprocal linking. Is it something you have to do?

Can your site succeed without reciprocal links?
Will you be penalized for reciprocal linking?

Link Popularity

Google workd off a premise that has been active in academic papers for years: citation authority.
They found that the more academic papers cited another's work, the more likely that cited work was to be an authority on the subject.

Similarly, when a lot of sites link to one site, it is 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 "cool beans" it's likely that page is an citation autority on "cool beans".
This is the basis of link popularity.

Manipulation of Links

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 SEO race. Many a scheme was hatched, including mini-sites, site networks, link farms, linkfarming, and reciprocal linking.

Reciprocal Linking

At the basic level, reciprocal links are links you trade with other sites (you add their link, they add yours) in order to build link popularity.
Quid quo pro - tit for tat - scratch mine scratch yours.

There are numerous online services, group exchanges, and software linkbuilders to help you link up with more like-minded webmasters.
As a result, many sites have grown sizeable directories on topics that have nothing to do with their site description, built simply to trade links.

Does this work? At the moment, it does seem to work.
The search 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.
So YES ... outbound links work ... regardless of from whom or what ... just as long as those links point to your website.

Will it continue to work? Who knows?

But all good things do come to an end ... but until then in bound links work!
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.

Link Relevance = Mutual Linking
Outbound links
SEO

Mutual Linking

Separate mutual linking from reciprocal linking.
Mutual linking is where the content of each site actually benefits each other's sites.

If you sell sex, you may want to recommend other sites for STDs and still other sites for rubber toys.
While it's technically still a reciprocal link, it has a mutual benefit for both sites, because you offer complementary traffic.

Standard link swapping only makes 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 monetize your site.

Should I Hide All My Outgoing Links?

Absolutely not. There have been many people who feel that since Google's Florida update (in Nov. 2003), adding relevant outgoing links seems to have a positive effect on rankings. But, if you hide or block their non relevet links, and they hide or block yours, what's the point of participating in a reciprocal linking program at all?

If you are looking to build long-term rankings (and real business links that can attract customers), DO NOT just sending out automated emails or join a linking programs.

Link Relevance is key.