So how do I enable SQLCMD Mode?

Well, in SSMS.exe, you click on 'Query' then 'SQL CMD Mode'. Simples!

But wait! There's a catch if your script has variables, or os prompts:

Because you are not starting SQLCMD from the command line, there are some limitations when running Query Editor in SQLCMD Mode. You cannot pass in command-line parameters such as variables, and, because the Query Editor does not have the ability to respond to operating system prompts, you must be careful not to execute interactive statements.

What then?

Open up the Command Prompt, and load your script in thusly:

sqlcmd -S servername -U username -P password -i C:\Folder\Script.txt

And then it'll all work nicely, assuming that the script itself is sensible. For more parameters for the SQLCMD utility, see here.