Great question
whizzkid23.
I had always wondered myself what they really meant. Trying to manually shift (on my 2001 3.0i) up through each gear, I similarly found that once I got to 3 or higher it would immediately shift back to 2. I had asked on here way back then and got wrong answers that I did not believe. I think others infer that the proper way is to have all 4 wheels off the ground, freely spinning (on a lift / jack stands / etc.), and to actually manually shift up to gear 5. I'd never think of trying that myself.
As usual, I think
Crowz has the answer here. From my BMW documentation source, reading it again now, I see it does fit with Crowz's answer.
"
3. Step on the brake firmly, apply parking brake fully and move the selector lever through each gear position, pausing briefly in each gear."
I infer that it means to shift into each "gear position" (P-R-N-D), not literally every gear (P-R-N-1-2-3-4-5).
I'll try to attach the whole PDF document, which includes specs on the ATF, etc., but only up to about 2002.
bmw_atf_application.pdf