What is the difference between "this" and "that" in "How much is this/that watch"?

I am studying English and I would like to know the difference about "this" and "that" at this phrase translating to Portuguese.

In the image, the subject held the watch and said "that", so I was in doubt.

1. How much is that watch? - Quanto é esse relógio?

2. How much is this watch? - Quanto é esse relógio?

I saw the difference about this and that here Difference between this and that.

In theory this is easy:

1. This/these is the English proximal deictic demonstrative determiner and pronoun. It represents the nearer (less distant) of two possible distances with respect to the speaker.

2. That/those is the English distal deictic demonstrative determiner and pronoun. It represents the more distant of two possible distances with respect to the speaker.

In practice, especially in your personal case, it may not be easy at all.

Iberian languages like Portuguese, Spanish, and Catalan provide three grades of locative deictics — not just two like you find in most dialects of present-day English. Where English now has only proximal and distal grades, Iberian languages also have a medial grade. See here for Portuguese.

So the first problem you encounter when translating is that you need to map three grades in an Iberian language to only two grades in standard English.

But another issue is that some speech communities assign these grades differently, particularly in Brazil where you may be coming from. If so, then your instincts and regular translation directions may not serve you well here.

See also: 1, 2. In particular, the latter mentions that:

No português coloquial brasileiro, "isso" e "isto" são usados como sinônimos, sem que se faça diferença entre eles, mas com grande preferência por "isso". A situação é análoga para essa/esta ou este/esse.

Rather loosely translated, that runs more or less like:

“In colloquial Brazilian Portuguese, "that" and "this" are used as synonyms, without any difference made between them but with strong preference for "that". The situation is analogous for [the gendered inflections of both those two words].”

Meaning that colloquial Brazilian makes isso (that) and isto (this) synonyms! Eeek! This is going to be very confusing for any instincts you could possibly have. Do please read that answer for more about all this.

I like @tchrist's answer going into the technical details, but I feel like it's missing a basic level of practical explanation. As a native British English speaker here is my instinct on what the rules are:

If you're holding the watch or are otherwise in obvious close contact with it, you must use "this"

If you're far enough removed from the watch that you might want to gesture at it, but still close enough that you could easily touch it without having to walk across the room for instance, you can use "this" or "that" freely. My "easily touch it" criteria isn't exactly correct, as I think this case would apply even if the watch is behind a glass cabinet, for instance — if you're close enough that you could touch it were the glass not there, you can still use either word.

If you're far enough away from the watch that you can't easily touch it, or you're using other sentences, rather than just gesturing, to establish the context on which watch you're talking about, you must use "that". For the latter case I'm thinking something like "I was discussing a watch with you the other day, remember? How much is that watch?". Of course in the latter case you might be tempted to use something like "the" instead of "that", but for reasons I can't quite explain right now "the" doesn't sound quite as good to my ear in that context.

This seems like a mistake. A native English speaker would almost never use "that" to refer to something they're holding, they would always use "this".

As the page you linked to says, "this" is used for things close to the speaker, while "that" is used for things farther away. Something can't get much closer than being held.