Is my Touch Dimmer (FC-505) supposed to have 3 stage lighting?

Yes, this is the way a touch dimmer is designed to maximize your dimming. 1 touch low level light, second touch medium and high for the 3rd touch. The fourth touch is off. Please see below videos showing how the touch dimmer should work.

http://www.youtube.com/watch?v=DLJ5bqCwzzw
http://www.youtube.com/watch?v=mEtQ51pi3nE
http://www.youtube.com/watch?feature=endscreen&NR=1&v=OaPC-oPvAwo