how to install squid proxy on ubuntu server

apt-get install squid3

edit the squid 3 configuration file in your favorite editor

sudo vi /etc/squid3/squid.conf

and set the transparency and the allowed hosts

http_port 3128 transparent
acl our_networks src 192.168.0.0/24
acl localnet src 127.0.0.1/255.255.255.255
http_access allow our_networks
http_access allow localnet

where 192.168.0.0/24 is the IP range of local network. Probably you need adjust the swap size

cache_dir ufs /var/spool/squid3 7000 16 256

where the first number denotes the size of cache in megabytes. Save you changes and restart the squid proxy by

sudo /etc/init.d/squid3 restart

For more detailed configuration read the manual of Squid or check the configuration examples on Squid wiki page.
Remember, the memory and processor usage of squid is a function of swap size.
Last but not the least we need to redirect the HTTP traffic to your new shiny proxy

iptables -t nat -A PREROUTING -i eth1 -p tcp -m tcp --dport 80 -j DNAT --to-destination 192.168.0.1:3128
iptables -t nat -A PREROUTING -i eth0 -p tcp -m tcp --dport 80 -j REDIRECT --to-ports 3128

where eth1, eth0 are the LAN, WAN devices and 192.168.0.1 is the IP address of your LAN device.

After all, probably you feel the need to monitor the performance of your proxy. Unfortunately, most of the squid log parsers in the Ubuntu repository are configured for Squid 2.x. Nevertheless, squid 3 uses the same log format, so you can change the log file path in your parser config file (sarg, calamaris, etd.) or simply link the log directory of squid 3 to the correct path

ln -s /var/log/squid3 /var/log/squid