Some bypass configs use 3 valves, others use 2, or even just one along with check valves. In the 3 or 2 valve situation, there are multiple valves to move when switching between bypass and normal. There will be cold water inlet to water heater tank at the bottom and hot water out of the top of the tank. Water flows in the direction of the long axis of the valve handles so you can visualize the flow direction. For normal operation the water should be allowed into the bottom of the tank and out of the top of the tank, while the bypass line should be blocked. Bypass mode should be the opposite for each valve.
One valve system, normal operation