Los Blancos have adopted a 4-3-3 formation in recent months, with results and performance much improved from the early stages of the season.
Ancelotti has also taken the time to praise Angel di Maria, who has recently been used as an advanced central midfielder.
"We play 4-3-3 because it provides us with more balance and our stats back that up. [Angel] Di María is playing well and is comfortable in his new position. He loves to play there," Ancelotti told reporters at a press conference.
"[Luka] Modric is fantastic. His current position allows him to move with the ball quickly and this is why he is playing well now.
"I think we are playing well and are confident at the moment. We are balanced but we could still improve. I'm
happy with the team."
Madrid are in Copa del Rey semi-final action against Atletico Madrid on Wednesday.