After what had been a quiet start to proceedings, Andy Reid brought the game to life in the sixth minute when he broke the deadlock for Forest. Jamie Mackie laid the ball off for the Irish midfielder, who in turn found the top corner of the net.
Diego Fabbrini was Watford's most influential player during the first half and it was he that had their first meaningful effort on target in the 33rd minute, but Karl Darlow in the visiting goal got down to hold the Italian's effort.
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As the opening 45 minutes drew to a close, Forest almost doubled their advantage, only for Henri Lansbury's low strike to cannon back off the upright, while Troy Deeney headed wide of the target from close range up the other end.
The Hornets started the second half brightly and their positive play was rewarded nine minutes after the restart. McGugan, who left Forest on a free transfer earlier this summer, sized up a free kick from 25 yards out and was able to beat Darlow with a powerful strike.
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The Watford new boy was replaced 10 minutes later by youngster Sean Murray, who almost scored with his first touch, but Darlow managed to stick out a leg to block his low effort.
Travelling Forest also continued to pose a threat and had a good opportunity to take the lead for a second time with 72 minutes played, but having capitalised on an error from Lloyd Doyley, Mackie failed to beat Manuel Almunia from a narrowing angle.
As the contest moved towards stoppage time, Forest substitute Ishmael Miller had two chances to score the winning goal, but his first strike was deflected wide of the target, while the latter was tipped on to the post by Almunia.
The result means that both sides remain undefeated in the Championship, with Forest top and Watford fifth.