Google added this great feature that helps AdWords customers figure out an estimated level of traffic that they should expect to see based on the CPC value and keyword phrase. But ad features are added, it adds an additional level of complexity for the end user. A thread at Search Engine Watch brought in a response from an official AdWords representative. I'll highlight some points in his post, that I hope will add more insight into how Traffic Estimator works.
Of course AdWordsRep starts off by saying that this is just an estimate and the data should be used as such. Do not think that an estimate of 10 clicks will actually be 10 clicks.
He then explains that the reason for the traffic estimator is not 100% right, is because there are just too many variables. These variables include; number of competitors, ad reach and impressions, keyword selection, daily (hourly) budgets, match options selected, current CPC as well as max CPC and other factors. This just touches on some of the many variables that must be used in the traffic estimator.
In addition, Nacho, a mod at SEW, asked if AdWords can add an impression estimation to the tool. AdWordsRep said he would ask, but he said it would be a logical assumption to say that "The number of estimated 'clicks per day' is based on a CTR in the neighborhood of 2%. This means that if you are estimated to get 2 click per day, the system is predicting 100 impressions."
If you have questions, comments or suggestions check out the thread named New Adwords Traffic Estimator.