Hi I use 0402 LEDs from Tayda electronics, or any source on ebay. Really cheap, lots of colors. I have used 0201 LEDs for signal bridges and lights on buildings. They are really small...!!
I use SMD resistors, 2.2kOhm or 3.3kOhm in series to limit the current, plenty bright. I have a method for soldering the LED to the resistor on double sided tape. Once the joint is made between the resistor and LED, it is pretty rugged. Then, I test the polarity of the piece with a DVM on diode mode. This identifies the "+" end for the blue wire- solder joint. Then solder the yellow or white to the "-" contact. I usually remove wires that I do not use by unsoldering from the PCB. I also double up the blue wire with one of the discarded wires to make it easier for routing in the shell.
Just noticed- you may want to pull off the plastic tube shield from the decoder and use Kapton tape on the frame to protect against shorts. It gives you a millimeter or two extra clearance.