Choosing Niche Keywords
Niche keywords are the keywords that are highly searched by the web surfers, and are rarely used by your competitors. Less competition means more traffic to your website. Targeting ten niche keywords is easier and more fruitful that targeting a highly competitive keyword. Traffic from niche keywords when directed to a relevant page increases your CTR and conversion ratio.
Determining CompetitionPeople generally take the number of results returned by search engines as the number of pages competing on a keyword. But it is wrong. The Search Engine Results get irrelevant after 10 - 15 pages. Irrelevancy further increases with the depth. The pages that have the keyword dumped in a corner are not competing against you, but search engines will still list them. In fact they have to.
It is assumed that if a webmaster is targeting a web page with a particular keyword, the keyword is used in the title as well as in the anchor text linking to that webpage. Such a page is listed higher by the search engines as it is dedicated to what you searched for. So how to filter out the most relevant results? Check it out!

Inanchor intitle and Its Precision - The SolutionIn Google, you can easily determine the EXACT number of pages that are competing against you. You can precisely list out the pages that are using a particular keyword in their page titles or in the anchor texts linking to them.

The query can be applied as follows: intitle:keyword inanchor:keyword.

For example, if the keyword is "hair treatment", the formula will be used in the following manner: intitle:hair inanchor: hair intitle: treatment inanchor: treatment. This figure gives you the exact number of pages that are ACTUALLY Targeting with these keywords, and not those that have just created a page or a small paragraph on the same topic. Google emphasizes on Anchors and Page titles. That's the reason, it supports such a search query.

We shall now discuss some other traditional ways to determine competition.
R/S Ratio
Here, R refers the number of competitor websites for a particular keyword as per the search result of the search engine. And S refers the number of searchers using that keyword while searching their queries. This means that for better results, you have to choose the keywords with lower R/S ratio.

R/S ratio becomes polluted when someone uses the number of results as the number of competing websites. As explained above, counting the number of results as the number of competing pages is the biggest mistake one can make while choosing a keyword. However, the figure becomes quite useful when inanchor intitle is used to create R/S.

KEI AnalysisKEI (Keyword Effectiveness Index) is a formula for measuring the effectiveness of a keyword. The formula was devised by Sumantra Roy. However, this figure also depends upon the number of searches and competition, but with a difference. This formula analyzes the number of searches and competition in such a way that if the searches increase, KEI increases; and if the competition increases, KEI decreases. Higher the KEI, more profitable will be the keyword. However, it becomes polluted when the number of search results are used as the number of competitors.
Determining TrafficDetermining traffic for a keyword is quite important before targeting it. Along with the competition stats, it lets you make out the niches present in any industry. Besides, it lets you predict (to some extent) how much traffic you can expect if you promote a website around a particular keyword. There are two known sources for determining traffic. Overture Keyword Suggestion Tool (now a part of Yahoo Search Engine) and WordTracker. When talking about accuracy, Wordtracker monitors the queries on some meta search engines that actually render it inaccurate . Reason? There is no known stat about how much of the community you are targeting is searching on those meta search engines. However, it's a good tool to make out the niches.

In my opinion, Yahoo owned Overture gives you more accurate stats than Wordtracker. This is for the reason that Overture is a PPC engine. It can show you how many people are searching for a particular term on its vast network. A network which is bigger than any Meta Search Engine. Still, it is not that accurate, but at least better than Wordtracker. The tools that are predicting Google Searches for you are just doing guess work. No one knows the algorithm they use.
Summing It Up
Profitability of a keyword depends more on the number of sponsors than CPC. Number of clicks and bidding quality can't be determined by just monitoring the first 3 or 8 places. It can be rightly assessed by taking out the average of all the 400 sponsors bidding on a keyword. Sounds very tiring for keyword research, right? Well, Keyword Country (http://www.keywordcountry.com) gives you not only the average of all the sponsors bidding on a keyword, but also the Max CPC from Google, Clicks per month from Google, No. of Advertisers present in Google Adwords system for a keyword, Competitors through inanchor intitle, R/S ratio and KEI with inanchor intitle, Traffic through Overture, and much more. All this enables you to make a wise decision while choosing the keywords.
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