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Madrid, like most other large European cities, has its fair share of petty criminals. Likewise, the tips for avoiding being a victim of petty crime are the same as you will find in most guidebooks. Be vigilant, keep your wits about you, and try not to look too much like a tourist. Be wary of "kind strangers" who offer to help, as they may in fact be thieves. Do not keep your wallet or any important documents in back pockets or other pockets that would be easily accesible to to pickpockets, and use a bag or purse that you can close completely (such as with a zipper) to minimize the risk of someone reaching in to take things. Be especially careful in touristy areas such as Puerta del Sol and the Plaza Mayor, and on the metro (subway).
When you must look like a traveller - eg transit to and from airport - use a money belt or inside pockets for passports and valuables.
Another tip when travelling from the airport is to use only authorized taxis, which are white with a red band across the side.
As far as health goes, Madrid does not pose any problems. Tap water is fine to drink and food poisoning, while possible anywhere, is not a big problem. As in most large cities, there is a fair amount of air pollution from cars which may be noticeable for those who come to visit from rural or otherwise less polluted areas.