As stated above. When you Mac first starts up (including a restart) the very first time you want to login as your user, you have to enter the password manually into the Mac. Subsequently, the Apple Watch will do it, as long as all the conditions are met (such as wi-fi, bluetooth, etc).
A similar analogy is that once a week you must enter your iPhone password. Or, after a restart. The rest of the time TouchID will do it.