Heed won their opening three games of the new season, including a brilliant turnaround against much fancies Salford City.
And that is the kind of result that gives Watson confidence that his side can challenge, but only if they cut out their mistakes.
"I think we've learned that we can compete with most teams in the league," he told the club's website.
"We've played teams that are mostly now at the top and we've been in every game we've played.
"We've conceded two goals on 44 minutes and two on 88 minutes. If you take those out of the equation, we're up and around the top three.
"Nobody has outplayed us, nobody has outfought us and hopefully the lads are learning as they go."
Gateshead finished August without a win in four games but Watson isn't too worried about the table at the minute.
"There's a long way to go, there's 39 games actually," he said.
"It's a marathon season and we've got two home games coming up and all we can really focus on is to get back on track."
Watson's first chance to rediscover form is on Saturday against a Maidstone United side under new stewardship.