Well to find the best kw's for your market http://www.digitalpoint.com/tools/suggestion/ will tell you traffic, and to get a base to start with check the title tags of your highest ranked competitors.

As for the second, competition is based on how many sites in the serps, how many have high PR, what the traffic volume is of the term, how much people are bidding in PPC (This determines conversion thus attractiveness) and many other factors.

Everyone has their own way to do kw research but the best person to start with is Dan Theis http://www.seoresearchlabs.com/ has some good data on his site, and also is a good guy to talk to if he has the time, which isnt always going to be the case.
Good luck

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