Island‐capable microgrids can potentially enhance the efficiency of distributed generations. In general, protection schemes in traditional distribution network cannot meet the requirements of microgrid internal protection. In order to solve the problem, this paper proposes the positive‐sequence fault component of current as the starting criterion. And a graph model describing the overall structure of a microgrid is established. The information about fault currents, including amplitude and direction, is acquired to locate fault branch. Furthermore, a new matrix algorithm is used to locate the fault point, so that the fault can be isolated. Finally, a microgrid model is simulated in the PSCAD/EMTDC software environment to illustrate the validity of fault location principle in microgrid protection. © 2015 Institute of Electrical Engineers of Japan. Published by John Wiley & Sons, Inc.