The Colombia star joined the Blancos from Monaco on a six-year deal for a reported £63 million earlier this week after dazzling with his nation at the World Cup in Brazil.
Before joining Monaco, however, the forward - who claimed the Golden Boot at the World Cup - won the Portuguese league three years in a row with Porto, where he played as an attacking midfielder behind the likes of countryman Radamel Falcao and Hulk.
And his former coach, Villas-Boas, believes that Carlo Ancelotti will need to deploy James in a similar position at the Santiago Bernabeu if the Italian wants to get the most out of the 23-year-old.
"A creative player like James has to have freedom of movement on the pitch," the Zenit Saint-Petersburg coach told Marca.
"In my opinion, the best position for James is in the No.10 spot, where he feels most comfortable. From that position not only can he finish the move himself, but he can also link up with a better-placed team-mate."
Villas-Boas admits that he always thought James would go onto achieve great things - but not at such a young age.
“We made the transfer at Porto with the clear intention of gradually developing the player and not with the expectation that he would explode so soon,” Villas-Boas said.
“I think he has all the conditions to adapt to the demands of Real Madrid and the pressure of a club.”