Plant functional traits could respond to the variation of habitat and directly influenced ecosystem function. In order to explore the underlying mechanisms of how fencing and grazing affected species coexistence and community assembly, we analyzed effects of fencing and grazing on plant functional traits and functional diversity in an alpine meadow on the Tibetan Plateau. The results showed that: (1) grazing significantly decreased specific leaf area and plant height at the community level. Under grazing, specific leaf area tended to decrease for forbs at the species level, however, there was no significant difference for sedges and grasses compared with fencing. (2) Leaf dry matter content was significantly negative correlated with specific leaf area. Leaf dry matter content and plant height was significantly quadratic functional correlation in the grazing treatment. Plant height decreased first and then increased with the increase of leaf dry matter content in the grazing treatment. Leaf dry matter content were lesser for grazing than that for fencing in the case of equal specific leaf area. Plant height was lesser for grazing than that for fencing in the case of equal leaf dry matter content. (3) Grazing decreased the average dissimilarity of traits among species, caused traits convergence on the whole. Dissimilarity of leaf dry matter content and plant height among species was significantly lesser for grazing than that for fencing. Functional evenness significantly increased, and functional divergence significantly decreased after grazing. The results indicated that different species had different response modes to grazing and fencing treatments. Grazing decreased competition for light among neighboring while could increase competition for soil nutrient. Soil nutrient was a key factor in the process of community assembly driven by grazing. Therefore, the influence of grazing on species coexistence attributed to competition for multiple resources.