In this paper, a new methodology combined with Harmonic Loss Sensitivity Factor (HLSF) and Direct Search Algorithm (DSA) has been proposed for optimal placement of capacitor on unbalanced and harmonically distorted three phase radial distribution system. In other words, an aggregate harmonic loss sensitivity factor, i.e., including fundamental component is used to decide the prospective optimal locations by using DSA to obtain the maximum power loss reduction as well as Total Harmonic Distortion (THD). The effectiveness of the proposed methodology has been investigated on IEEE 13-bus radial distribution system. By obtaining the optimal size and location of shunt capacitors from the proposed methodology yields in minimum aggregate power losses including from various harmonics as well as fundamental power frequency. The results has also been compared and found to be better over literature work, where Particle Swarm Optimization (PSO) was used to obtain capacitor placement while maintain THD within acceptable range of standards.