This paper proposes a new technique for transformer protection. The technique is concerned with the detection of the fault generated high frequency current transients by means of a specially designed relay unit. The relay, tuned to a band of high frequencies, is used to capture the transient currents from both sides of the transformer; the differential and average currents between the two sides are then calculated. The spectral energies of these current signals are extracted to produce the operate and restraint signals; a comparison between the levels of the two signals determines whether the fault is internal or external to the protected zone. A new technique for inrush detection has also been proposed in this paper. The technique detects inrush current by using the high frequency components contained in its current transient signal. The restraint signal is derived by computing the ratio of the spectral energy of the transient signal to the fundamental current. A comparison between the level of restraint signal and a pre-defined threshold determines whether a magnetizing inrush is in process. Simulation studies with respect to different fault and inrush conditions have been conducted, and the results prove that the proposed technique is able to offer fast responses in protection and accurately discriminate between inrush magnetizing current and internal faults.