Aiming at the problem that inrush current can lead to the maloperation in differential transformer protection, this paper came up with a new method to identify inrush current and fault current based on wavelet and modulus maximum. Because inrush current contains a large component of aperiodic component and dead angle, while fault current always keeps its fundamental frequency. The new method is just based on these characteristics. Firstly, it uses wavelet to decompose original signal, then select maximal points based on the theory of modulus maximum, by using the numerical relations between maximal points can distinguish different current signal. By adopting Matlab/Simulink, the simulation showed that this method can distinguish inrush current and fault current reliably.