Abstract: The capacity issue of asymmetric two-way amplify-and-forward relaying is investigated. First, exact and asymptotic outage probabilities of the network scenario under investigation are derived over Rayleigh fading channels. Then, it is found that the system outage probability is determined by the terminals average transmission powers and the traffics that the system operates. For most of the traffics, the overall system outage probability depends only on the one-way channel. Following this analysis, novel power allocation and relay location algorithms are proposed, both of which are based on the traffic-knowledge of operating networks. The simulation results show that the outage performance is significantly improved when the proposed algorithms are applied.