For winterizing, set the valves just like the diagram. As you can see, water will not enter the water heater. You are basically blocking the in and out from the water heater and opening a line in between the two. For using the water heater, open the in and out to the tank and close the in between so that cold and hot water don't mix. It sound complicated at first, but you'll get used to it.
2014 Georgetown 351DS
-TruCenter -Front/Rear CHF -Hellwig Links -Tiger Trak -Ran McNally GPS -ScanGauge -Truck Systems TPMS -5 Star Tune