I have a number of small quibbles with your description, mostly related to terminology. However, there is one big exception I take that I will begin with.
Even if our hypothesis does not completely agree with reality, that is seldom a reason to completely dispose of it and start over. I'd venture to guess that very few, if any, hypotheses correspond exactly with reality. Certainly, a hypothesis of any sophistication that attempts to tie many different observations together into a comprehensive theory is very unlikely to be 100% accurate in its first incarnation.
Instead, if a hypothesis has flaws, the first step is to see if the flaws can be corrected while keeping the major premises of the hypothesis intact. Thus, I would add another step, or perhaps modify step (4), to allow for modification of the hypothesis, if possible, to account for discrepancies between the hypothesis and observations made in the testing step.
Ridicule is the only weapon which can be used against unintelligible propositions. Ideas must be distinct before reason can act upon them; and no man ever had a distinct idea of the trinity. It is the mere Abracadabra of the mountebanks calling themselves the priests of Jesus. -- Thomas Jefferson
For we know that our patchwork heritage is a strength, not a weakness. We are a nation of Christians and Muslims, Jews and Hindus -- and non-believers. -- Barack Obama
We see monsters where science shows us windmills. -- Phat