Use opkg to install the privoxy package.

opkg install privoxy
vi /etc/privoxy/config
/etc/init.d/privoxy enable
/etc/init.d/privoxy start

Change the listen-address in /etc/privoxy/config to your router ip address such as listen-address 192.168.1.1:8118. You need change default setting permit-access 192.168.1.0/24 to something else if you use a different subnet.

Last you need start up the proxy server with command /etc/init.d/privoxy start. To have it start on boot, enable the init script with /etc/init.d/privoxy enable.

You'll need to add the proxy information to your internet browser to use it.

Below is an example of the /etc/privoxy/config file.

confdir                      /etc/privoxy
logdir                       /var/log
filterfile                   default.filter
logfile                      privoxy
actionsfile                  match-all.action  # Actions that are applied to all sites and maybe overruled later on.
actionsfile                  default.action    # Main actions file
listen-address               192.168.1.1:8118
toggle                       0
enable-remote-toggle         1
enable-remote-http-toggle    0
enable-edit-actions          1
enforce-blocks               0
buffer-limit                 4096
forwarded-connect-retries    0
accept-intercepted-requests  0
allow-cgi-request-crunching  0
split-large-forms            0
keep-alive-timeout           300
socket-timeout               300
permit-access                192.168.1.0/24
debug                        1     # show each GET/POST/CONNECT request
#debug                       4096  # or Startup banner and warnings
#debug                       8192  # or Errors - *we highly recommended enabling this*
#admin-address               privoxy-admin@example.com
#proxy-info-url              http://www.example.com/proxy-service.html