Step 4: Decreasing
You have about 2 inches left to go, and you need to reduce the number of stitches down to a small number, ideally in the ten to fifteen range. Decrease one each X stitches every Y rows, and let X and Y get smaller as you go along. I decreased within my 2x2 rib pattern as below (you'll want to work out a decrease strategy that fits with the pattern you're knitting). Really I just worked it out as I went along. Knitting is stretchy and forgiving and it's hard to go very wrong.
First decrease row: purl 2 together every other 'ditch', or each 7th & 8th stitch. This brings the number of stitches down by an eighth.
Knit 4 rows around without decreasing, matching the new 2,2,2,1 rib pattern.
Second decrease row: purl 2 together every remaining 2-stitch 'ditch', or each 6th & 7th stitch. Now I'm down to three quarters of my original number of stitches, and a 2x1 rib pattern.
Knit 3 rows around without decreasing, in 2x1 rib.
See how it's going? Next, knit 2 together every other raised rib (5th & 6th stitch). Knit 2 around. Knit the rest of the knit pairs together to get a 1x1 rib. Somewhere around here you'll find the circular needles are too big for the number of stitches you have, and you'll want to switch over to the double-pointed.
Decrease every row from here on out, knitting 2 together every few stitches each row until you've got only a few left.