To set up a WebSocket server in Node.js, use the 'ws' library to create a WebSocket server and handle events like connection, message, and disconnection. This enables real-time communication between clients and the server.

WebSockets provide a full-duplex communication channel over a single TCP connection, enabling real-time data exchange between clients and servers. In this guide, we’ll go through the steps to set up a WebSocket server using Node.js and the popular 'ws' library:

1. Understanding WebSockets: Unlike traditional HTTP requests, which are stateless, WebSockets maintain an open connection for continuous communication. This is ideal for applications that require real-time updates, such as chat apps or live notifications.

2. Installing the ws Library: To get started, install the ws library, which is a simple and efficient WebSocket implementation for Node.js:

   npm install ws
   

3. Creating the WebSocket Server: In your project, create a file named server.js. Set up your WebSocket server by requiring the ws library and creating a new instance:

   const WebSocket = require('ws');
   const server = new WebSocket.Server({ port: 8080 });
   
   server.on('connection', (socket) => {
       console.log('New client connected');
   });
   

   This code creates a WebSocket server that listens on port 8080 and logs a message when a new client connects.

4. Handling Client Connections: Inside the connection event, you can handle incoming messages from clients:

   socket.on('message', (message) => {
       console.log('Received:', message);
       // You can send a response back
       socket.send(`Hello, you sent -> ${message}`);
   });
   

   This code listens for messages and responds to the client.

5. Broadcasting Messages: To send messages to all connected clients, you can iterate through the clients property of the server:

   server.clients.forEach((client) => {
       if (client.readyState === WebSocket.OPEN) {
           client.send('Broadcast message to all clients');
       }
   });
   

6. Handling Disconnections: You can also listen for when a client disconnects from the server:

   socket.on('close', () => {
       console.log('Client disconnected');
   });
   

   This ensures that you can manage resources effectively as clients connect and disconnect.

7. Testing Your WebSocket Server: To test your WebSocket server, you can use a WebSocket client, such as the browser’s console or tools like Postman. In the browser, use the following code:

   const socket = new WebSocket('ws://localhost:8080');
   socket.onmessage = (event) => {
       console.log(event.data);
   };
   socket.send('Hello Server!');
   

   This code connects to the server and sends a message.

8. Conclusion: By following these steps, you’ve set up a basic WebSocket server using Node.js and the ws library. This server allows real-time communication between clients and the server, paving the way for building interactive applications.