Yes, switch 1 off, switch 2 on. Switch 3 is not used (set to off). After assembly, connect it to your Mac, then launch Disk Utility, which is in your Applications/Utilities folder. (If when you turn it on you're asked if you want to initialize the drive, click Cancel, then launch Disk Utility.) Click on the drive in the left pane (and not any volume that might show up, which would be below and indented), then click on the Partition tab. You can choose 1 volume of 4 TB, but if it were me I'd choose 2 volumes from the pull-down. I'd make one of them 3.5 TB (for your Time Machine volume) and the other 500 mb for additional working space if you needed it. While in this window make sure you click on the Options button and choose GUID for your partition map, then click on Apple to initialize the drive. After that, label the Time Machine volume as "Backup" or something. If you do two partitions, name the other one whatever you'd like.
If OS X doesn't ask you if you want to use Backup as the Time Machine volume, you can open the System Preferences from the gray apple in the upper left corner of the screen, then choose Time Machine and turn it on and select the drive. It should start backing up within a minute or two. First time is the longest - the subsequent hourly backups are faster.
"Raw" is not an acronym, abbreviation, nor a proper noun; thus, it should not be in capital letters.