Er hat seinen Faden verloren.

English Translation

He lost his rag.

Is that the right translation? Or is it more along the lines of ‘he lost his train of thought’?

This doesn’t seem right.

Yes, “den Faden verlieren” means “lose the train of thought”, but that makes this translation wrong, because “to lose one’s rag” means “to get angry”.

See lose one's rag - Wiktionary, the free dictionary
and den Faden verlieren - Wiktionary, the free dictionary