Real have won six of their opening eight fixtures in the league but defeat to Atletico Madrid and a draw with Villarreal has seen them drop five points off Barcelona and their city rivals, both of whom have perfect records.
Ancelotti - who took over from Jose Mourinho at the Bernabeu in the close-season - believes his side can pull themselves back into contention for the championship, but acknowledged they must improve defensively.
Real have conceded nine goals so far, while Barcelona and Atletico have only let in six apiece.
"I'm pretty self-critical with my team, but I have to be objective," the Italian said. "This team, by individual quality, must play better.
"We have to improve defensively and on the speed of the game, I'm sure we will improve because the players have understood.
"The problem we've had is that we have conceded a lot of goals. All players have to work harder on defence.
"We have character, personality and experience. Therefore I have confidence."
Real return to Liga action on Saturday when they welcome Malaga to the Bernabeu.