As long as you are not running your pump full speed (an you shouldn't be) you should be able to completely close (handle across the pipe) that valve and have all water go through the heater. It is designed to accept the full flow up to 125gpm. Looks to be an LX or LT heater (same heater, different control panel). If you, for some reason, use the full speed, the handle is probably already set to its proper position. Your pump is capable of about 160+gpm at full speed, hence the need for a bypass.