It may never hold a knifedge well, but you can do several things to make it better than it is now.

When you say it drops, does it drop with the nose still pointed up, or does the nose fall though to a nose-down attitude? If you move the CG back, you can help the rudder keep the nose up which in turn helps reduce the rate of descent.

I don't know what you're using for a prop either, but going large diameter/low pitch will help as well, since the engine will produce more static thrust which will help.

When I knife edge a trainer, I first pull pretty sharply upwards before rolling, to get the nose way up, like 30-45 degrees up, to get the engine pulling upwards as much as possible. It's still sloppy as all heck, but it helps.

If your radio has mixes, you might try mixing out the roll and pitch coupling with rudder. Put the mix on a switch so you don't always have it on, but engage it before rolling to knife edge. It's amazing how much easier knife edge flight is if you can mix even some of the coupling out.

Oh, and try it on the left and right sides. It's possible that the plane will knife edge better one way than the other due to things like side thrust built in to the engine mounting.

If you're willing to experiment, you can also try making a bigger rudder for the plane. Enlarging the rudder can help more than just increasing rudder deflection, though it also introduces other issues.

In the end, it's still a trainer though, and you'd do better learning knife edge with a better suited plane.