The present work discusses a novel oxy-fuel combustion cycle utilized in compression ignition internal combustion engine. The most prominent feature of this cycle is the air intake is replaced by oxygen, therefore NOX emissions is eliminated. The enrichment of oxygen lead to higher flame speed and mass fraction consumption rate, on the other hand, the high concentration of oxygen presented during combustion will result in intense pressure rise rate which may cause severe damage to engine hardware. As water injection is already utilized in gasoline engine to control knocking, the utilization of water injection in optimizing oxy-fuel combustion process has been tested in this study. To understand the relationship between water injection strategy and cycle efficiency, CFD simulations were carried out. The model was carefully calibrated with the experimental results, the errors were controlled within 3%. The operation parameters such as speed, oxygen fraction, water injection pressure and temperature were set according to experiment data. By doing so, this study investigate the effect of water injection strategy in improving cycle efficiency based on the calibrated model. The simulation results show that the injected water absorb combustion heat to evaporate, therefore increase amount of working fluid lead to higher cycle efficiency. As water injection quantity increasing, the water consume too much heat thus deteriorate combustion lead to lower cycle efficiency. On the other hand, different injection timing and temperature were selected to study its effect, results show that earlier injection timing will cause the direct interaction between flame and water lead to lower combustion efficiency and late injection timing provide insufficient in-cylinder temperature for high efficient evaporation rate. In this case, the optimal injection strategy is 1:1.11 fuel-to-water ratio, 365°CA timing and 160 °C temperature, cycle efficiency can be improved by 5.2% under this strategy.