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Lightning strokes on transmission lines will lead to the wrong response of boundary protection relays, which are based on the high frequency transient components at a single line terminal, due to the large amount of high frequency components produced by lightning strokes. Based on researching the characters of surge arresters and a large amount of Electro-Magnetic Transient Program (EMTP) simulations, the different characters of transients between the lightning stroke and common faults are found out, and an algorithm based on the wavelet transform for the identification of short circuit faults and lightning strokes is proposed. The IEEE recommended frequency-dependent model of ZnO surge arresters and lightning model, the frequency-dependent line models and the lightning fault arcs models are utilized in the model. The EMTP simulations show that the result is correct.