I try to change status from In progress to Watchlist but it tells me that I don't have permission to go in that order.
I had the same error message when I tried to change the status of a ticket from (lets say) A to C in our tracker.
The problem was that the workflow didn't allow to change from status A to C directly. I had to change it to B first and then from B to C. So I think the status "Watchlist" can't be accessed directly from "In progress" in your quality-center. Sadly QC always shows all status a ticket can have and not only the status the ticket can be changed to (like e.g. redmine does).
Hope this helps
We use the Easyredmine package for our Redmine installation, so I don't know if this is different in "basic" Redmine. When you define workflow permissions, you have the option to omit unwanted statuses on the "status transitions" matrix. Those omitted statuses aren't shown to the user depending on their group permissions.