For accurate modeling and optimization of the air-powered engine, the basic model of the air-powered engine’s working process was established at first. Experiments on a prototype modified from an internal combustion engine were carried out to verify the air-powered engine’s feasibility and the basic model’s validity. Based on the experimental results, a balanced valve was designed. Afterward, the virtual prototype with the newly designed valve system was built and relative simulations were conducted to analyze the dynamic performances of the air-powered engine. Results show that the valve controlling model is easy to achieve parameterization. The output performance of the designed valve is superior to that of a solenoid valve. Furthermore, the inertia moment of the flywheel is analyzed to balance the starting performance and speed fluctuations. At last, orthogonal design and gray relation analysis were utilized to optimize the valve timing parameters, and optimized values of the cam rise angle and the cam return angle are proposed. This research can provide theoretical supports to the new air-powered engine prototype’s design and optimization.