Don Cowie latched onto Grzegorz Rasiak's 22nd-minute flick and was presented with the freedom of the Palace half to run on and score the opener as the visiting defence stood and appealed in vain for a flag.
Warnock was lectured by referee Grant Hegley after some vociferous protests of his own and then sent two substitutes to follow Martin up and down the touchline for the remainder of the half.
Warnock said: "I wanted to make sure that we kept an eye on the offsides so I had my subs warming up with him.
"We were very disappointed obviously with the goal but a couple more before that as well.
"The referee came over to speak to me and I thought he handled it very well.
"He has to take the linesman's decision as he sees it. The fourth official had a word with me all afternoon but that is what he is there for. I have no problem with him."
Palace, who went two down to a 72nd-minute Jose Fonte own goal, have now lost six of their last eight games to fall down the table and Warnock admits that unless he can secure some quality loan signings in the next week a second successive play-off challenge is unlikely.
He said: "I didn't see Watford have many chances and Tommy Smith and Jobi McAnuff flattered them a bit.
"That's the type of player we are looking for.
"It is still possible but we don't have the quality at the moment. I am trying to get a few loan players in but the climate is difficult to get anyone in at the minute.
"Watford had a few more leaders out there this afternoon but I certainly didn't see much of a Chelsea influence in their play."
Watford boss Brendan Rodgers - former reserve manager at Stamford Bridge - praised his side for standing up to the physical examination of Palace's direct style and coming out on top.
Palace started with two wide men in Watford's 4-3 FA Cup win at the end of January but got back into the game by playing directly.
Targetmen Alan Lee and James Scowcroft started in attack this time and Rodgers was pleased with his previously shaky defence's resolute display.
He said: "In the FA Cup game we were 4-1 up with 15 minutes to go and they went more direct and got some joy.
"So I expected them to start that way this time and that's how it went but we coped magnificently well with it.
"We stood strong and showed good organisation and when we had the chance to play football we created some good chances."
Rodgers has now seen his side claim nine points from nine in the last three games without conceding a goal and believes his change of mentality at the club is now paying off.
He said: "The art of success is hard work. There is no trick to it. I have looked to change the way we play and work that was always going to take time but over the last few six weeks that has shone through.
"How I work has always brought me success and I have done the same here that I have done elsewhere. It is not the traditional method of training but it has worked with kids, with the best players in the world at Chelsea and now it is working here.
"They understand tactically what it is we are trying to do and it is paying off."