A method for locating and sizing reactive power compensation to improve reactive power transmission and reduce power system losses is proposed. Through reactive power flow tracing， the method identifies the transmission paths of the reactive power load. Using the relationship between reactive power flow and branch active power losses， the method defines the power loss allocation coefficient and selects reactive power compensation points. The expression of the power loss allocation coefficient for the reactive power load is derived， and the formulae for optimal capacities of reactive power compensation are obtained from an approximate model of power loss optimization. The result of 39-bus test system verifies the validity of the method. With the coefficients clear physical meaning， easy computation process and good performance are obtained in both optimizing reactive power distribution and reducing power losses.