Do you have 'unlock with phone' turned on? I think that is needed for the wrist activation to unlock the watch as well. And I think it works off the wrist, as long as you put it against something (like the palm of your hand) but will re-lock if you lift it off.
Try this sequence.
- Put watch on wrist.
- Unlock iPhone with code or fingerprint (just need this once after you are wearing the watch. Ok to relock phone after doing it.)
- Now try the watch. If 'unlock watch with phone' was enabled, and 'raise wrist to enable' are both on, the watch should now be unlocked on your wrist until you remove it again.
- Test by pressing the digital crown in. You should go straight to menu without a passcode request.