The short answer is that any ranking system ranks you relative to others. The Alexa Traffic Rank ranks your site relative to all other sites in the world.
A good analogy is running a race. Let’s say that yesterday you finished the race in 3rd place. If you race again today and have a faster time, you could still finish in 4th place if 3 other people run faster than you. Even though you ran a faster race, your ‘ranking’ got worse because other people ran even faster.