To alleviate the negative impacts on ecosystem caused by cascaded development of Yuan River, this study quantified the ecological requirements and incorporated them into the cascaded reservoir operating schemes to provide the streamflow that balances fish habitat protection and hydropower generation. Physical habitat simulation model is proposed to simulate the relationship between streamflow and physical habitat for various life stages of Cyprinus rubrofuscus Lacépède and Bagarius rutilus Ng & Kottelat, and to determine the ecological requirement as a discharge range associated with the upper area of a certain proportion of maximum Weighted Usable Areas (WUA). Then the optimal operation model of cascaded reservoirs is established. Maintaining over 70% of maximum WUA as an example, the optimization technique could increase the hydropower generation of cascaded reservoirs by 3.60%, 1.93% and 4.19%, and also improve the ecological conditions by increasing the WUAs by 11.3%, 17.9% and 16.2% for Section A and 7.4%, 12.4% and 14.4% for Section B under wet, normal and dry conditions, respectively. Furthermore, the trade-offs between hydropower production and fish habitat conservation are discussed. The optimal compromises were identified at the knick points in the established relations where 50%–70% of maximum WUA are conserved at a cost of 11.72–52.11 billion kWh (1.8%–8.4%) power generation loss.