To establish stream order for a watershed using GIS is quite complex despite the simplicity of the end visualization. Using a DEM you can establish flow direction. This tool uses the elevation data in the DEM to calculate per pixel what direction water would flow. Then you can calculate the flow accumulation. This calculates how many pixels flow of water would into any given pixel. Once you know this you can establish hydrology "stream orders." A stream order of 1 is a stream with no other streams flowing into it, or headwaters. A stream order of 2, has 2 or more stream orders of 1 flowing into it. A stream order of 3, has 2 or more stream orders of 2 flowing into it. And a stream order of 4, has 2 or more stream orders of 3 flowing into it. The "threshold" is the lowest value of a pixel in the flow accumulation raster considered for inclusion in your watershed orders.
