Excluding undocumented migrants in setting Congressional districts "is more consonant with the principles of representative democracy," the order said.
States that have policies encouraging unauthorised immigrants "should not be rewarded with greater representation," it said.
It pointed to strongly Democratic California, the country's most populous state with 53 representatives in the House.
The order said that six percent of the state's population are illegal aliens, and if not counted it would lose two or three seats in Congress.
The issue of counting non-citizens in the census has been fought for decades.
Legal experts have repeatedly said changing it requires an amendment to the constitution.
Republicans maintain the current counting method favours Democrats, though Mr Trump's party controlled the House for eight years straight from 2011 to 2019 when the Democrats won it back.
The census does have an impact, but not clearly in one party's favour.
In 2010 mostly Republican-leaning states including Texas and Florida gained seats, while losers were split between the parties.
Last year conservative-leaning Alabama sued to have undocumented migrants excluded from the count, saying it would benefit with greater representation in Congress.
The Trump administration last year sought to add a citizenship question to the census count, now well underway, to the same end.
But the Supreme Court ruled that Mr Trump's argument was not constitutionally sound, implying he had merely political motives.
How the census will determine which respondents are legal and which are not is unclear in Mr Trump's order. It tells the secretary of commerce to help determine such information.
But the order was expected to run into immediate legal challenges.
The American Civil Liberties Union called it "patently unconstitutional."
"The Constitution requires that everyone in the US be counted in the census. President Trump can't pick and choose." said Dale Ho, director of the ACLU's Voting Rights Project.
"We'll see him in court, and win, again," he said, referring to the earlier citizenship question case.