The passcode is one of the basic security features on the Apple Watch.
Many owners are reporting that the passcode entry falters after the first digit - that is you can only enter the first digit, any following digits are not accepted.
Solution: Reset. Hold the side button and then slide the Power Off choice to the right. To restart, hold the side button until the Apple logo appears.
BTW, this sort of reset seems to correct a number of anomalies.