You must watch out because my revenge will be terrible.
You must look out because my revenge will be terrible.

Would watch out or look out be appropriate in this context?
and I would say the other way around to john, sensing that look out would mean needing to be alert and on guard in a physical way at all times - so, clearly, no real answer to that one!
Great reply guest, whether 'look out' or 'watch out' - just get out of the way quick!

I also fully agree with John the difference is subtle.
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Watch out would be better. It has the connotation of general awareness of a threat.

Look out is more like physically keep your eyes open for some event.

Having said that, they tend to be used interchangeably. It's subtle.
 suzi's reply was promoted to an answer.
if an object were flying toward you and someone shouted "look out" you would move equally as fast as with "watch out", both being action words, however as a noun "look-out" is the clear choice
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 chris's reply was promoted to an answer.