Link building - getting backlinks to your website - is of highest importance in your traffic generation efforts. Backlinks and content are what search engines respond to. The more backlinks you have, the more traffic you will get (assuming you have quality content on your pages).
Backlinks to your website are links on other websites pointing "back" to you. They are also called inbound, incoming, or inpointing links.
The Importance of Inbound Links
Google and other search engines view an inbound link to your site on another website as a "vote" for your site from that other site. Google counts these "votes" and gives more exposure to websites with higher number of backlinks. Sites with lots of inbound links must be of good quality since so many people link to them, Google thinks.
Therefore, when it comes to attracting free search engine traffic, link building is crucial. However, it's not the number of incoming links alone that matters, but also from what kind of websites they are coming. Links to your site on quality "authority" sites (like Yahoo, Amazon, government sites etc.) carry more weight than links on smaller, less "prominent" sites. So try to get some quality links.
Natural Link Building
All the same, the number of backlinks is important, so gather as many of them as possible. Try to aquire inbound links from a variety of sources. Google appreciates websites that get a steady trickle of links from different places more than those who get lots of links in a short period of time. Always try to get links from quality sites, and avoid "link farms"!
If Google suspects your backlinks aren't coming naturally, your website may get "sandboxed", meaning the ranking of your site will be delayed. So, try to make your linking look natural; for example it looks more natural if you build 10 links a day back to your site for 10 days rather than doing 100 links in one day.
Content Comes First
Before you start working on getting the incoming links, you must make your site worthy of receiving a link. Build your website to at least 50 pages of high quality content, and also have links to other useful websites. Backlinks will "work" only on websites with good content, and people are more likely to link to your site if they find it interesting and valuable. Therefore, link building is a waste of time unless you create quality content for your web pages.
Also, don't monetize your pages until you have a considerable number of backlinks and visitors. Ads and affiliate links on your pages will reduce your chances to get backlinks, especially from 'authority' sites.
Anchor Text Linking
Sometimes you will just make a "straight" link to your website, like this:
http://www.yourdomain.com (which would link to your home page).
However, more often than not, you will use anchor text when adding your inpointing links to other people's websites. Anchor text is the word(s) you attach the link to so they get blue and underlined, and clickable.
In-depth explanation on anchor text linking here.
Keywords as Anchor Text
As anchor text you will use keywords that are closely related to the content of the web page you link to. Don't use the same keyword (phrase) each time you create a backlink; use variations of the keyword or different keywords (but still related to the page's content).
You will use this linking method on articles that you submit to article directories, in your signature when posting on forums, when commenting on other people's blogs, when exchanging links, and more.
Contextual Linking
is when links are embedded in the normal text of a web page. A context link is attached to a few anchor words of the text and flows naturally into the text. The link will lead to another page within your site, or to another site. The content on that other page must of course be relevant to the linking text.
Clickthrough for contextual links are typically higher than for other links (and chances are that Google appreciates them, too), so in your efforts at attracting inbound links you should strive for contextual link building.
Example of a Context Link:
When building backlinks to your website, it's important to use keywords as anchor text to get the best effect possible.
Links From Related Websites
Remember that a link from a related website counts much more than a link from a non-related website. So, for this website I'm aiming at getting backlinks from 'online business' websites rather than sites about 'dog training', for example.
Find Number of Backlinks
You can get the total number of incoming links by typing into the search box of Yahoo.com: 'link:www.yourwebsite.com' and then selecting 'Except from this domain' and 'to: Entire Site'.
At Google you'll get more detailed information on your backlinks by using their Webmaster Tools. To view your links you'll have to set up an account with Google (it's free).
Link building isn't difficult, but it takes time and work. There are many ways to create inbound links, and many sources to get them from. Below are listed some articles that explain different methods for backlink building.

Generate Backlinks and Build Page Rank
To receive free, organic (natural) traffic from the search engines, it is critical to generate backlinks to your website. Backlinks build your page rank and increase the number of visitors to your website.
A Link Building Package Can Boost Your Traffic
You need backlinks to generate traffic to your website. With a good link building package you can increase your page rank and get many more visitors.
You Can Buy Inbound Links
You can buy inbound links (backlinks) to increase page rank and website traffic. Getting backlinks to your site is the key factor to generate free organic traffic from the search engines.
Backlink Builder Tool
A good backlink builder tool will help you build backlinks to your website. Creating backlinks to a website can be a tedious and time consuming task, and link builder tools can lessen the work considerably.
Link Building Guidelines
As a webmaster you should be familiar with common link building guidelines. You have to to make sure the search engines will approve of your backlink building strategy.
Contextual Link Building
Try to use contextual link building when building backlinks to your website. Contextual links are the most valuable in the 'eyes' of the search engines.
How to Increase Page Rank
You must know how to increase page rank in order to attract organic traffic from the search engines. Building page rank is mostly about getting backlinks to your website.
One Way Link Building Services
Using one way link building services will help you build backlinks at a much faster speed. As you know, backlinks are crucial to build page rank and attract free traffic from Google and other search engines.
3 Way Links
You can use 3 way links to create backlinks and build page rank. 3-way links are seen as one-way links by the search engines, and can be a good supplement to your link building arsenal.
Link Building Cost
As you know, you need backlinks to your website in order to get traffic, so you may worry about the link building cost. However, it is possible to build backlinks without spending money at all.
Link Building Mistakes To Avoid
Avoid these link building mistakes when trying to build backlinks to your website. Creating backlinks is important, but you must do it the right way.
Link Building Strategy - 5 Factors
A good link building strategy is crucial to attract free traffic from the search engines. Google rely heavily on backlinks to determine the value of your website.
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