This question has been asked time and time again and it isn’t always an easy answer. Some common signs that you may have a Google penalty are the following.

1. Your site has been deindexed by Google

2. You have seen a big drop in Google traffic.

3. You get a message in your webmasters tools account?

4. You drop from page 1 to say page 10 for a particular keyword.

These are some common signs of a Google penalty and just because one of these happens it does not mean that you have a penalty . The above mentioned are just indicators. Of course except #3 in which if you get a message from google4 that you have a penalty then guess what you do.

So what can you do?

The first thing you will want to do is check for the obvious, Such as does your site have any hidden text or duplicate content.

Next you will want to check to see if your site has been hacked. Some information on this is available on this Webmasterworld thread

Finally you will want to check for any malware on your site. This can be done through Google webmaster tools.

Finally once you have found any issues submit a reinclusion request through Google webmaster tools.

Recently Matt Cutts from Google has discussed this on the video below.

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