I have done night trains in Europe numerous times over the last 5 years.
When I was 24 in 2004, I did Interrail for 2 months all over Eastern and Western Europe, and spent 2 months again in Europe this past summer
The worst place for pickpockets in Europe are Spain and Italy, you really have to be on your toes there.
Most hostels in Europe have lockers in the rooms for valuables, use them!
There is absolutely no need to carry your passport around (unless youre in one of the countries that cops are on the take and ask for ID just to nab you, like Moldova or Russia).
The idea of a sewn-in zippered pouch is a good one, and an easy alteration before you leave. Do not bother carrying a money belt around (may as well paint a target on you) A fake wallet is a good idea as well, but a couple monopoly bills in it too
When going out on the town, especially if indulging in Prague's finest ales, its a good idea to just take some cash, and maybe one card, leave the wallet, and definetly the passport at the hostel.
As for sleeping in train stations... never done it, and wouldnt recommend. Much better to take a night train. When on a night train, keep your valuables on yourself, not in your bags, always lock the compartment and most importantly always appear "poor", never flash cameras, etc.