I have a '99 with a 4.6 V8 and pull a 14 ft. enclosed race trailer. The trailer and karts probably weigh 3000 lbs. I run at around 58 - 60 mpg and in OD the trans shifts back and forth often, not good? With the OD off, the rpm's are around 2800, which is how I run the truck.
What is the deal in OD with the motor jumping up and down 300 or so rpm? This isn't 3rd gear at this rpm.

 

Sounds like your torque converter is locking-unlocking.

It also sounds like you have a 3.0? axle ratio and/or oversize tires.

I never tow in OD (GCW 11-12K)

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Y2K™

Toreador Red, Keyless XLT SC SB 5.4L E4x4 4wDisc/ABS, 3.73LS, Skid, HD 7700# Towing, LT-245's on Chrome, Tube-Steps, Captain's, 6CD, Tonneau, named: "Nick"

 

If your torque converter is unlocking or your trans is downshifting too much during towing, take it out of OD. The higher rpms will still cause less wear and heat than all the searching. Smaller engine and lower "number" gears combined with large loads are causing this. My setup towing approx the same load does not do this at all unless you are climbing tall terrain.

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2000 F-150 XL,RC,LB,5.4,4R70W,3.55LS,
4-wheel disc/ABS,Chestnut/Parchment,
Ford bedliner & gas/wheel/spare locks,
3" cold air box modification,Superchip,
Dynomax ultra-flow welded 3" cat-back.

 

Don't tow in OD . the bands are pretty delicate. The Od is setup for driving empty.
I bought my truck used and about 2000 miles after I got it the OD went belly up, dealer said it was from towing in overdrive. Thank god, still in warranty