Your valves don't select ON-OFF, but instead, select the route the water will take. In one position, water goes straight through and into (or out of) the water heater, in the other position, water turns 90 degrees and goes down the tube that bypasses the water heater.
Look at the handle on the valve, thats the patch the water will take.
NOTE. HOW I WINTERIZE MY WATER HEATER
I place the water heater valves in bypass.
Drain the water heater, remove the drain plug and open the over pressure valve. Leave the drain plug removed and store it in a baggie or something inside the water heater compartment.
After I've pumped antifreeze through the rest of the plumbing, my final step is to momentary open one of the bypass valves on the water heater so a little antifreeze will go into the water heater.
This will prevent any water pockets from freezing and also acts as a preservative and anti corrosion agent inside the water heater.
(Note, I'm not filling the water heater with antifreeze, just a little in the bottom to displace the water
2001 Coachmen Mirada (Ford F53 6.8L V10) - Toad 2001 Civic
It won't do MACH 2, but I can get a sandwich and take a pee.