Ideally, it should be in the air stream but not where it gets hit by infra-red radiating up from the hot asphalt. On my e36s, it is in the air duct that carries air from the hole in the air dam under the front bumper back to the front brake rotor.
My e46s don't have an enclosed brake cooling duct, but the sensor is in a similar location at the front left corner of the car. Should not be hard to find. It is a black plastic peg that sticks an inch or two out into the air stream.