There are several ways to mark waterlines (assuming you aren't working on a kit that has the waterline molded in). The pencil method works fine, provided the hull is kept absolutely level and absolutely rigid. (Sometimes it's easier to mark the waterline with the hull upside down.)
Another system involves a laser level - a piece of modern carpenter's technology that's recently become reasonably affordable. Sears, for instance, sells one for about $35.00. It's a battery-powered gadget that emits a bright red disk of light, which forms an absolutely straight line on any object it intersects. Set the hull on a good, solid support, being sure it's abolutely level. Set the laser level to the right height (it's got built-in bubble levels and adjusting screws for the purpose, and a threaded hole for mounting on a camera tripod if you like), and turn it on. A bright red line appears on the hull, right at the waterline. Mark it with a pencil or fiber-tipped marker, and you're in business.
That method isn't necessarily any easier or more accurate than the pencil trick. But the gadget comes in handy for other purposes. I mainly build sailing ships; it's great for lining up masts and yards. (Set the laser so the line is projected vertically. If the entire length of a mast is lit up, the mast is vertical - and straight. You can also adjust masts for rake angle, by adjusting the angle of the laser.) It also comes in handy for plenty of more mundane household tasks - such as leveling pictures on the wall.
In any case, the big challenges in striking a waterline lie first in getting the line straight and horizontal, and second, if it's a black or white "boot topping" stripe, in getting the width right. The stripe, in virtually all cases, needs to be a consistent width
when viewed from the side. Unless the ship is very sharply pointed at both bow and stern, the stripe is
not actually the same width throughout its length.
That fact is due to the changing cross-sections of the ship. In the hull of an aircraft carrier, for instance, the hull at the waterline is almost vertical at the bow and amidships, but slopes at a steep angle at the stern. The width of the waterline stripe, measured with a pair of dividers, may be as much as twice as wide at the stern as it is at the bow - but when the model is viewed from the side the stripe seems to be the same width throughout its length. Marking an accurate waterline stripe on a hull like that isn't easy. (Some folks try to represent waterline stripes with black tape. They're surprised when it doesn't look right. That's why.)
Let us give thanks to those kit manufacturers who mold waterline markings - very faintly - into the plastic.