GOOD question! I guess thats what the song means when it says "Life is but a dream..." I guess they say you can't feel pain in a dream. So if you feel pain, that could be an indicator. Also, your other senses like smell and taste...

1) I don't know. I usually assume that I am awake. Sometimes, I feel that I am dreaming. In those cases, I think I know that I am not awake. 2) However... We know that some things are impossible in our usual reality. So if we are experiencing those things, we are dreaming. But dreaming could also be the only contact that we have with the *true* reality, and what we experience as reality could be an illusion. Or our reality and our dreams could be two different illusions, none of them being the reality. 3) "While one dreams a non-lucid dream, one will not realize one is dreaming (one classic example is a child dreaming that they are using the toilet and end up wetting the bed because they don't realize that they are in a dream). This has led philosophers to the idea that one could be dreaming right now (or at least one cannot be certain that one is not dreaming). First formally introduced by Zhuangzi and popularized by Hindu beliefs, the dream argument has become one of the most popular skeptical hypotheses. Buddhism, one of the major religions and philosophies in the world, makes most use of this argument[citation needed]. It was formally introduced to western philosophy by Descartes in the 17th century in his Meditations on First Philosophy." Source and further information: http://en.wikipedia.org/wiki/Dream#Other_associated_phenomena