Pictures are hard to tell things from. I hope I am not adding to confusion here.
What should I do?
It looks like your wrists are bent which will give you arm pain over a ride. I know it sounds strange but ride no handed and put out your arms where they would feel comfy. I use a trainer at home. If you find that your comfortable range is say almost at your knees you could go for a shorter stem or go the other way and lower the bars and use more of your core to support yourself. It's the in between that will get you.
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Yes, as someone said, saddle adjustments are for positioning your body relative to the bottom bracket (saddle fore/aft), your seat height, and saddle tilt.
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