Yes this does happen. It happened with me too. I dreamt of something, and i was living it. i was living it the way you now see what i have written here. It was a reality for me, just like the sun rising everyday, just like the image that you would see in the mirror.
And then someone told me that its just a dream, that i ought to wake up. Wake Up? oh c'mon, this is truth. i am here and this is what really it is. what do you mean by "wake up"? you must be nutts.
No, but that person was right. i realised it. and i realised it a hard way.
I realised that i was not living my past. it was also not my future. and It wasnt even the present. It was actually nowhere. Not on this earth at least.
I realised it a hard way, and i also gave that friend of mine a hard time making me realise this. It was tough though. How about me saying "it is ought to happen this way when i was doing so and so...and now that you say it hasnt happen, shall go back or re do the so and so, so that it happens...and i can make sure it happens. because you know, it has to happen that way only. that is what it should be like."
My god, i could have been such a pain. but yes i was. and i am not now. i know and accept i made a fool of myself.
But how do one realises that he/she is getting into some this sort of thoughts? i dont know this. Its true people say that you learn by your mistakes or you learn by your experiences.
all i can say is, hear to what your close well wishers tell you and try not giving them hard time while realising that you are actually becoming a painful dreamer.