It sounds as though you're trying to edit the order of a
smartlist rather than a
playlist. These are two very different things...
A Playlist is a manual list of things. You create the list and add things to it. You can then move the things up or down and 'update order' to save the changes. See the buttons across the top of the list...
A smartlist is basically a saved search. You set the rules where matching files are returned, and you can also, optionally, set sorting rules too. If you don't, the default sort rules are applied. As the list is generated from the search rules, moving items up or down is not possible because the list is dynamic, changing dependant upon which files match the search at that time. As such, you get a different set of buttons at the top.
If you like to preserve the set of files returned from a smartlist in a playlist, press F8 to create a new playlist, and name it. Note that it opens in the bottom left corner of the program. Select the files you want from the smartlist and drag them to that currently empty list in the bottom left corner and drop them there. Now select that list in the tree and you will find that you can now order them as you wish, and the 'update order' button is there for you to save those changes.
Hopefully that helps a tad...