The very first shot should show the character laying down to go to sleep. The director should have some sort of push-in to his head. If not, add a slow zoom to show the character sleeping.
Fade In to the next shot, which should begin the dream sequence. This signifies the events are taking place in the character's head.
Add some sort of tint to the dream sequence shots. If the color looks identical to the real world it becomes tough to gauge what is real and what is a dream. Of course, if that's your goal, more power to you.
In addition to color tinting, fool around with different types of transitions and effects. These events are not real, after all, and can afford to be seen as creepy or trippy.
Edit the music as well. The score (composed music) should sound much different, be it either slowed down, sped up or mangled.
Instead of fading out to signify the end, the character should wake up abruptly, usually at a very important point in the dream.
All you need to do here is quick cut to the character waking up, but waking up already in motion. You do not want to quick cut back to the bed and THEN see him wake up. The quick cut should be from dream sequence to character in motion.