Five hundred and fifty traditional villages in Shanxi Province were studied with ArcGIS 10.2 tools, using the combination of quantitative and qualitative methods such as average nearest neighbor index, kernel density estimation, and buffer analysis. The spatial distribution characteristics and settlement characteristics of traditional villages in Shanxi Province were studied from the perspective of watershed. The results show that: The spatial distribution types of ancient villages in Shanxi Province in the four major basins of Fen, Hutuo, Qin, and Zhangwei rivers are all condensed. The traditional villages in the province present a distribution pattern of “three groups and more scattered points in one area”, more than half of the ancient villages are located in the Yellow River system. Traditional villages in Shanxi Province have similarities in near-water distribution, as well as differences in distribution between upper, middle, and lower reaches, main and tributaries, and left and right banks. The settlement characteristics in different basins are remarkable. The Yellow River Basin is represented by cave dwellings, the Fen River Basin is represented by Shanxi Merchants’ Courtyard, and the Qin River Basin is represented by castle-like settlements.