How does vocabulary level work?

I think it’s supposed to show by orange color which words could be useful to learn at the current level.
But how should I upgrade it?
If I feel I’ve reached the higher level, and I upgrade it manually, does it mean it will color green all the words included in this level, even those I haven’t marked as known yet?
And if I will not upgrade it manually, does it mean it will never upgrade itself and I will not see more words colored orange?