It can trace all system calls used.
But what differs a sys_call from a normal call??
Answer
As Matthew said, strace uses the ptrace(2) system call to work its magic. ptrace is used to implement debuggers and other tools which need to inspect what another program is doing. Essentially, strace will call ptrace and attach to a target process.
Whenever the target process makes a system call, it will stop, and strace will be notified. strace will then inspect the registers and stack of the target process (also using ptrace) to determine what system call was being made (each call has a unique number, passed in a register) and what the arguments were. strace then resumes the process. When it returns from the system call, it is stopped, and strace is notified again, so it can inspect the return value. strace prints some information for the user each time this happens.
In response to your second question, a system call is different from a normal function call in that a system call is implemented in the kernel, while a regular function is implemented in userspace. That's a whole separate can of worms though.