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I've created a custom list in SharePoint 2010, but I believe I've missed a step somewhere.

I tested out the "add a new item" button. The item still shows as new after having been viewed.

Is there another step I need to do to ensure it doesn't continue to show new even though it's been viewed?

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Items will still be tagged as "New" even after they have been viewed.

By default in SharePoint 2010, the "New" icon will continue to be displayed for 2 days.

You can check the setting via Powershell:

$webApp = Get-SPWebApplication "http://YourWebApp/"
$webApp.DaysToShowNewIndicator

You can change the "New" tag duration to 1 day as follows (or zero days by swapping "1" for "0" in the 2nd line below):

$webApp = Get-SPWebApplication "http://YourWebApp/"
$webApp.DaysToShowNewIndicator = 1
$webApp.Update()

Code borrowed from this post.

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