The European champions went on a 22-game winning streak prior to the Christmas break but have been out of sorts since the turn of the year and were knocked off top spot in La Liga by Barcelona at the weekend.
They scraped through to the Champions League quarter-finals on Tuesday - despite a 4-3 home loss to Schalke in the last 16 - and Ancelotti has stressed that he is not fearing the sack.
"I'm not thinking about the sack," the Italian coach told reporters after the game.
"I keep doing my job, trying to do it better. I need to do better. We must say it clearly: we are playing very badly. It is pretty hard to understand, after what we did up until December.
"We need to look at our defence. That's where all our errors are. No team has put four past us at home. We lacked organisation.
"I'm very sorry, as everyone saw, we played very badly and it's bad for our image. All the criticism we get is justified.
"We're professionals, we don't make ourselves look ridiculous. It's not easy to explain what happened. We've lost confidence.
"What happened with the fans is normal. We are the first to say that we played badly and the whistles are deserved."
Luka Modric made a long-awaited return from injury in the game against Schalke and Ancelotti was delighted to see the Croat back in action.
"Modric returned and that was the only good thing tonight. He will be very important for us."
Real Madrid will attempt to get back to winning ways when they host Levante on Sunday, with kick-off scheduled for 21:00CET.
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