In order to improve the ability of transformer differential protection to identify inrush current and internal fault current, a new method based on the correlation of waveform fitting was proposed. First of all, using sine fitting method fitting the differential current waveform, then using the correlation analysis principle to calculate the correlation coefficient which is between differential current and it’s fitting curve. By using this correlation coefficient can identify inrush current and internal fault current. The simulation results show that: this method has clear principle, rapid identification, high distinguishability, strong anti-interference ability, and is easy to be implemented in the microcomputer.