You can explain it literally, like below. Or it is an allegory, meaning: Slow down a bit. You are too fast. You want too much. Your expectations are too high. Reduce your objectives (/goals). A notch is a... - Well, imagine a machine with a lever (/an arm /a hand gear) on it. This lever can be set (/turned) to a line of notches, adjusting the speed or the size of the products made by the machine. You can choose the speed or the size by moving it from one 'notch' to another.

"take it down a notch" = make less intense (for example, make slower, smaller or quieter)