Jordan Obita struck the decisive goal after Simon Cox and Darius Henderson had clawed Forest back into the match after they fell two goals behind inside 12 minutes through Pavel Pogrebnyak and Kaspars Gorkss.
Reading also had former Forest full-back Chris Gunter sent off late on for a second booking after Obita's goal, but the visitors held out to record a first win in five matches.
"It was a great game and it could have gone either way," said Davies.
"The first 45 minutes, we didn't compete, the second 45 was much more like us. The third goal was crucial and in the end we lost because we switched off in the centre of the park and it has cost us dear.
"I thought there only looked one team likely to win in the second half at 2-2. We had a couple of very good chances, but I thought in the second half we were much better, much more aggressive with the ball and without the ball.
"We again created a lot of chances and restricted them to few chances. Then we shot ourselves in the foot by not getting that third goal and then switching off, which was disappointing."
Forest were without several first-team players against the Royals, including Chris Cohen, who will miss the rest of the season with a knee injury, but Davies refused to blame injuries for his side's defeat.
"Chris Cohen, Kelvin Wilson, David Vaughan and Danny Collins, take your pick, they are all important players, but we don't make excuses," he added.
"The first 45 minutes was not down to these players who were out, it was down to not competing well enough."
- Sports & Recreation
- Chris Gunter
- Pavel Pogrebnyak
- Kaspars Gorkss
- Jordan Obita