Virtualenv is a tool that creates an isolated Python environment for each of your projects. For a particular project, instead of installing required packages globally, it is best to install them in an isolated folder in the project (say a folder named venv), that will be managed by virtualenv.
The advantage is that different projects might require different versions of packages, and it would be hard to manage that if you install packages globally. It also allows you to keep your global /usr/local/lib/python2.7/site-packages folder clean, containing only critical or big packages that you always need (like IPython, Numpy).
To install virtualenv, simply run:
$ pip install virtualenv
Let's say you have a project in a directory called myproject. To set up virtualenv for that project:
$ cd myproject/
$ virtualenv venv --distribute
If you want your virtualenv to also inherit globally installed packages (like IPython or Numpy mentioned above), use:
$ virtualenv venv --distribute --system-site-packages
These commands create a venv subdirectory in your project where everything is installed. You need to activate it first though (in every terminal where you are working on your project):
$ source venv/bin/activate
You should see a (venv) appear at the beginning of your terminal prompt indicating that you are working inside the virtualenv. Now when you install something:
$ pip install <package>
It will get installed in the venv folder, and not conflict with other projects.
To leave the virtual environment use.
$ deactivate
Important: Remember to add venv to your project's .gitignore file so you don't include all of that in your source code!
It is preferable to install big packages (like Numpy), or packages you always use (like IPython) globally. All the rest can be installed in a virtualenv.
For easier management of different virtual environments for multiple packages. Installing Virtualenv Wrapper is possible. For installation instructions read the virtualenvwrapper documents here.
One thing to mention is that virtualenvwrapper keeps all the virtual environments in ~/.virtualenv and does not add them to the project directory.