Stem cells, which can self-renew and generate differentiated cells, have been shown to be controlled by surrounding microenvironments or niches in several adult tissues. However, it remains largely unknown what constitutes a functional niche and how niche formation is controlled. In the Drosophila ovary, germline stem cells (GSCs), which are adjacent to cap cells and two other cell types, have been shown to be maintained in the niche. In this study, we show that Notch signaling controls formation and maintenance of the GSC niche and that cap cells help determine the niche size in the Drosophila ovary. Expanded Notch activation causes the formation of more cap cells and bigger niches, which support more GSCs, whereas compromising Notch signaling during niche formation decreases the cap cell number and niche size and consequently the GSC number. Furthermore, the niches located away from their normal location can still sufficiently sustain GSC self-renewal by maintaining high local BMP signaling and repressing bam as in normal GSCs. Finally, loss of Notch function in adults results in rapid loss of the GSC niche, including cap cells and thus GSCs. Our results indicate that Notch signaling is important for formation and maintenance of the GSC niche, and that cap cells help determine niche size and function.