Due to significant distributed generator penetrations, microgrid protection issues have an impact on power system reliability. As a result, fault identification and protection in microgrids are critical and must be addressed to improve the power system's robustness. If any fault arises in or outside the microgrid (MG), the microgrid should get disconnected from the main grid promptly using a static switch like a circuit breaker situated near the point of common coupling (PCC). To supply reliable and quality power to the consumer by reducing the burden on the utility grid this paper proposes a "Cluster Microgrid System". The proposed system is formed by integrating neighbourhood microgrids and is designed to operate both in autonomous and grid-connected modes. Moreover, Wavelet Transformation based frequency multi-resolution technique is also proposed for detecting different type's faults appearing in different locations of a cluster microgrid system. To locate these faults, the Daubechies-4 wavelet decomposes the extracted signal into detailed and approximated signals along with the two-terminal traveling wave phenomenon. The proposed wavelet transform-based cluster microgrid system is implemented in MATLAB/Simulink 2021a environment. To verify the robustness of the proposed system, the proposed Wavelet Transform (WT), and Wavelet Packet Transform (WPT) techniques are analyzed and compared by considering performance indices such as standard deviation and mean absolute deviation, median absolute deviation, and entropy. From the results, it is observed that WPT gives fruitful results when compared with WT.