The Hornets play host to the Eagles in the early kick-off on Saturday, with a Wembley semi-final the prize on offer, and Gracia's men are likely to be the favourites, having already beaten Palace twice this season in the Premier League.
However, Gracia believes Roy Hodgson's men have improved as the season has progressed and says it would be foolish to read too much into the previous games.
The Spanish tactician is expecting a tight encounter at Vicarage Road and, as such, he has had his players practicing penalties in the build-up, admitting they need to be prepared for extra-time and what may follow.
He told the Watford Observer:
This week we have practised penalties, tomorrow we will again.
"It's something that maybe happens and we have to be ready. The squad is focused and knows how important is the next game.
"I prefer to win in normal time to suffer less, but we have to be ready to win at the end. If that's with extra-time or penalties, the most important is at the end of the game if we achieve to be in the semi-finals
Bore Draw Money Back: Refund for any Soccer game that finishes 0-0 at bet365. Applies to losing pre-match bets on any Correct Score, Half-Time/Full-Time or Scorecast markets. Bet restrictions and T&Cs apply. New and eligible customers only.