Decomposable Reward Modeling and Realistic Environment Design for Reinforcement Learning-Based Forex Trading
Nabeel Ahmad Saidd
Reinforcement learning (RL) for foreign exchange (Forex) trading requires realistic execution modeling, interpretable reward design, and action spaces that respect market constraints. Existing approaches often simplify these aspects, limiting policy transparency and practical relevance. This paper presents a modular RL framework integrating three components: (1) a friction-aware execution engine enforcing anti-lookahead semantics---observations at close_t, execution at open_t+1, and mark-to-market at close_t+1---while modeling spread, commission, slippage, rollover financing, and margin-triggered liquidation; (2) a decomposable 11-component reward architecture with fixed, pre-specified weights and per-step logging, enabling attribution, ablation, and auditability; and (3) a 10-action discrete interface supporting scaling, reduction, closure, and reversal, with legal-action masking enforcing margin-aware feasibility during training and evaluation. Empirical evaluation on EURUSD training-split data reveals non-monotonic interactions among reward components, demonstrating that additional penalties do not consistently improve performance. The full reward configuration achieves a terminal training Sharpe ratio of 0.765 and cumulative return of 57.09%. Comparing action spaces, the extended 10-action interface increases cumulative return but reduces Sharpe relative to a conservative 3-action variant, revealing a return-activity trade-off under a fixed training budget. Scaling-enabled strategies consistently reduce drawdowns, with the combined configuration delivering the strongest endpoint performance. Supplementary diagnostics on GBPUSD, USDJPY, and AUDUSD exhibit qualitatively similar trends. These findings demonstrate the framework's diagnostic value and underscore the importance of controlled, interpretable design in RL-based financial systems.
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