I have written Google in the Title but this article is perfect for other search engines like Yahoo, Bing, Yandex and others. So you have a website and you start cross linking to other sites to get high SERP (search engine results page) and PR for better performance on the result page.
But there is a very important part related to cross linking. Do you know Google spider bot is very clever and it may ruin your all hard work in just few minutes. There is no harm in linking but make sure you do that in your site niche and that’s really very important.
Suppose if we have a recipe website and we add a link to a technology blog. Then our naughty Google spider will think that you are selling the text links on your blog and that’s not allowed by their Official Webmaster Guide.
So its better to link to another recipe site only. Similarly this rule applies to all types of blogs. But sometimes What happens good sites also get penalized by their bot.
Since bot works on the algorithm made by the engineers so it may happen with everyone, it is a machine. Then you can fill their Penalty Correction form.
But How to know whether we are really penalized by them or not? The best answer is to look at our Analytics stats. Suppose earlier we were getting 200 visitors per day for a long period but now it is just 30-40 visitors then we have to think about it.

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Yes.. we should check in webmaster and webmaster forum…
But i don’t think they will penalize entirely from SE. most of Website is running for Money.
Good Point Abhi.
@Siva – That’s true it won’t penalize entirely from SE. But you will lost all your traffic and thus no traffic means no money.
Great info , now i will try to make comments only my blog related niche sites .
How does the spider bot know if the sites share the same information? Does it look for similarities between tags, keywords, description, body etc.. on the linking websites?