Is the FC-505 touch dimmer supposed to have three stage lighting?

Yes. This is how a touch dimmer is designed to maximize your dimming. One-touch low-level light, second-touch medium, and high for the third touch. The fourth touch is off.

Please see additional resources below:

• 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