Additional information like what version are you using? From the looks of the screen shot I'm guessing it's not Arc Pro.
You absolutely can trace lines to create a polygon.
Create an empty polygon for editing. (Either in gdb or shapefile)
Open an edit session. Go to the Editor tool bar - Editor drop down and select More Editing Tools.
Select the Advanced editing. There is a Trace tool on that tool bar you can use to create the polygon shapefile.
NOTE: sometimes while tracing (if it seems to 'hang up') you need to move your mouse back / forth over the line. I think this happens when there are tons of vertices.