Real has won six of its opening eight fixtures in the league but defeat to Atletico Madrid and a draw with Villarreal has seen the club drop five points off Barcelona and its city rival, both of which have perfect records.
Ancelotti - who took over from Jose Mourinho at the Bernabeu in the close season - believes his side can pull back into contention for the championship, but acknowledged the club must improve defensively.
Real has 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 defense. We have character, personality and experience. Therefore I have confidence."
Real returns to Liga action on Saturday when it welcomes Malaga to the Bernabeu.